AI bubble may burst... authorities are standing by doing nothing

Former Korea Minister of SMEs and Startups, Hong Jong-hak, has been warning since last year that the surge in artificial intelligence investments could lead to a financial crisis similar to the 1997 Asian currency crisis. When asked why his warnings have not been heeded, Hong recalled his own experience of being unprepared for the 1997 crisis, saying, "I wish I had had one more warning before the currency crisis hit."

Speaking to the newspaper 한겨레 on the 27th, Hong stated that warnings about an impending AI bubble have been issued by the United States and Europe, and that this AI bubble has a high likelihood of bursting, potentially surpassing the 2008 global financial crisis. He expressed regret that the current situation in Korean society has no preventive measures in place.

Hong emphasized that just as historical technological innovations such as railways, radio, and dot-com booms have demonstrated, innovative technologies tend to create bubbles. He also pointed to the peculiar financial structure of the current investment landscape, where venture capital firm investments are followed by purchases of their products by those same clients (the "vendor financing" cycle) and major firms like Meta creating special purpose vehicles to move debts off their balance sheets.

He further noted that a significant portion of this financing is flowing through insurance and shadow banking entities in the form of closed-end funds, which are evading oversight due to the lack of exposure assessment by regulatory bodies. Hong lamented the failure of institutions created after the 1997 crisis, including the Korea Reserve Bank, Financial Committee, Financial Supervisory Service, and International Financial Center, to respond to emerging crisis signals.

He criticized officials for maintaining silence and research institutions for only offering compliant commentary when government scrutiny is required. Hong outlined three immediate actions needed: 1) Establishing a constant monitoring system through research institutions like the International Financial Center and KDI to closely monitor AI bubble risks and publicly report them; 2) Identifying exposure by having the National Assembly request data on US venture capital loans to Korean entities; and 3) Strengthening foreign exchange safety nets through expedited currency swap agreements with the US and Japan to bolster exchange rate defenses.