Can Democracy Survive the Next Financial Crash?

The AI sector is at risk of a financial crash, which could in turn cause a broader economic collapse. Companies like OpenAI and CoreWeave have recently cut revenue projections and seen their share prices plummet. Investors are increasingly seeking protection through credit-default swaps, indicating waning confidence in the AI sector.

If a crash occurs, the president will have the power to implement a bailout, with near-limitless authority. Since the 2008 financial crisis, the Federal Reserve and U.S. Treasury have increasingly claimed power to handle financial emergencies. During a Trump presidency, he could likely bypass Congress entirely and use the bailout apparatus to enrich his favored companies and CEOs.

This could exacerbate wealth inequality and lead to a concentration of power in the hands of the wealthy. The bailout authority is a dangerous weapon that, once triggered, could result in public deficits and debt, zombie companies, and a shift of losses from perpetrators to the public. Historically, bailouts have been designed to support blameless firms that would otherwise be solvent.

However, in practice, bailouts have often benefited the financial sector at the expense of the broader economy. After the 2008 crisis, the Federal Reserve and Treasury used Section 13(3) of the Federal Reserve Act to purchase financial assets and provide loans. While this helped stabilize financial markets, it did little to address the broader economic impact.

Congress attempted to address distributional consequences with the Dodd-Frank Act, but largely left the Fed's discretion intact. During the COVID-19 pandemic, the Federal Reserve expanded its bailout efforts, utilizing Section 13(3) to purchase a wide range of assets. While bailouts can provide short-term relief, they often come with long-term costs and can exacerbate existing inequalities.