Too big to fAIl

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Let’s step back from the ledge for a moment and assume that artificial intelligence doesn’t kill us all. Despite everything you’ve seen and heard, the odds favor our continued existence.

But another harmful scenario — one that’s much more likely than mass extinction — is that the companies leading the AI boom fail to deliver a return on the trillions being raised for the technology’s infrastructure and deployment.

AI narratives have powered equity markets for the last two years. If that story is punctured, it will depress investment portfolios, kneecap consumer spending and slow the economy. In a nightmare scenario, the circular financing arrangements and opaque lending strategies that now support the industry’s growth start to unravel. Financial contagion ripples across the frontier labs, the hyperscalers and the Wall Street institutions powering the build-out. Credit markets go kablooey. Governments come under pressure to respond. Dogs and cats living together, mass hysteria.

What then? Washington would have to ponder if AI’s leading lights should be allowed to fail. And right now, there isn’t a clear sense of how a potential collapse would reverberate across the economy.

“I don’t think we have a great understanding of where those risks lie, if they’re even out there,” said one bank regulator who was granted anonymity because they hadn’t been authorized to speak publicly. We don’t really know how much short-term debt — which is sensitive to changes in Federal Reserve rates and sudden shifts in economic conditions — has underpinned the build-out. And “that stuff has a way of creeping up in ways you don’t necessarily see until it unwinds.”

The “too big to fail” question is a complicated one. Not only because the AI money machine is enormous and economically potent — the notion of a five-year-old company raising $2 trillion in a public offering would’ve been laughable three years ago — but also because the technology’s continued development is a strategic imperative.

As President Donald Trump put it, “WHOEVER WINS AI, WINS!”

Trump has flexible and muscular views on how and when his administration should intervene in markets and private enterprise. Sometimes that energy is directed at a sputtering chip company. Other times, it’s Spirit Airlines. He’s speculated openly about the government taking stakes in frontier labs. If “winning AI” is still a priority, it stands to reason that there would be a case for providing federal support in a crisis.

One thing’s for certain: If there’s ever a crisis, a federal backstop would be politically toxic. A majority of voters view the technology as a potential existential threat to humanity, according to POLITICO’s latest poll. Broad-based antipathy for AI data centers can be linked to concerns about energy costs, water usage, noise pollution and general anxiety about AI-related job loss. Florida Republican Gov. Ron DeSantis and Rep. Alexandria Ocasio-Cortez (D-N.Y.) — two potential presidential contenders — said separately they would oppose federal bailouts should AI heavyweights collapse.

Industry bailouts are never popular. At the height of the financial crisis — when it seemed like the economy would fall into another Great Depression — anti-Wall Street sentiment killed former President George W. Bush’s initial attempt to get Congress to sign off on a $700 billion bailout for major financial institutions. It eventually passed. Even though the public viewed Big Banks as vampiric cephalopods, “serious policymakers could understand that you needed to rescue the financial system because the financial system was necessary to the basic functioning of the economy,” said Graham Steele, a University of North Carolina professor who served as the assistant Treasury secretary for financial institutions under former Secretary Janet Yellen.

With AI, “there’s a lot of promise in future prospects that it could become the bedrock of the economy, but it’s just not embedded in the same way” as banks, Steele said. But given the industry’s current array of political headaches, “they’ve got a PR problem as well that makes it even less palatable.”

OK, maybe it’s time to step back from that ledge again. Maybe we don’t have visibility into the systemic risks posed by AI because they don’t exist. Or maybe the productivity gains we’ve been promised will soon be quantifiable, visible and profitable.

The most likely risk is comparatively mundane. A temporary market correction. Painful for Wall Street but not the sort of thing that causes permanent damage to our economy, collective psyche or our survival as a species.

The American Enterprise Institute’s Michael Strain identified the risks he sees around AI in prosaic terms.

“Maybe we’re in for something like a 10 or 15% correction in equity prices that really puts the brakes on consumer spending, and puts the brakes on business investment and risks a real slowdown in the rate of economic growth,” he said. “I’m more worried about that than I am about the end of life on Earth.”

IT’S FRIDAY — This is my last edition of Morning Money. It’s been an honor to lead this newsletter for the last four years. I’m not going far. I’m moving over to POLITICO’s newest offering on tech, the economy and politics. If you haven’t already, you should subscribe to Decoded. Our first edition will run on Oct. 5.

There are so many great reporters who’ve made this newsletter work. You see their bylines in Morning Money every day. There’s one name that appears at the bottom of each edition that deserves special attention. Mark McQuillan’s depth of knowledge, writing chops and talent for shaping stories is the secret sauce. Every reporter needs an editor, and for the last few years, I got to work with the very best. I’m going to miss working with him. And I’m so excited to see what he and Declan Harty cook up when Morning Money enters its next chapter.

DRIVING THE DAY

Industrial production and capacity utilization data for August is out at 9:15 a.m. … Fed Vice Chair for Supervision Michelle Bowman delivers remarks in London, beginning at 9:30 a.m., on “Bank Stress Test Reforms” … The House Financial Services Financial Institutions Subcommittee holds a field hearing in Richmond, Kentucky, on “Main Street Capital Access Act: Empowering Community Banks to Drive Economic Growth”

WHAT’S NEXT FOR HOUSING —- Register now for POLITICO’s Policy Outlook: Housing Affordability on Sept. 23 to hear in-depth conversations on the forces shaping today’s housing landscape, from mortgage rates and credit availability to affordable housing subsidies and private investment. The lineup includes Sen. Lisa Blunt Rochester (D-Del.), National Rental Home Council CEO Adrianne Todman, Walker & Dunlop's Frank Cassidy, the D.C. Department of Housing and Community Development's Colleen Green and more. Register here to attend in person or watch online.

O Canada

Canadian Prime Minister Mark Carney held an investment summit in Toronto this week in a bid to lure more money for the frozen North from foreign firms, and POLITICO’s Canada politics and trade reporter Zi-Ann Lum was on the ground for the event, which happened smack dab in the middle of a trade spat between Canada and Trump.

But Zi-Ann told MM she didn’t pick up on nervousness from U.S. investors about attending.

“First of all, Carney’s team kept a very controlled environment to intentionally keep any interactions with the press at a minimum to make their investor guests comfortable without the worry of reporters being around,” she told MM. “But some who I did manage to have conversations with viewed the trade war as competition, and competition is ultimately good for business because they’re looking for long-term stability. They wouldn’t have shown up if they were nervous.”

She also observed firsthand how Carney’s government is going about dealmaking.

“One new thing that I learned, because I saw with my own eyes, was how involved Canadian Ambassador Mark Wiseman, a former BlackRock executive, is in executing this FDI piece of Carney’s agenda,” Zi-Ann said. “He was key in organizing the summit — which is notable because the man has a demanding day job. He put BlackRock’s Larry Fink, Blackstone’s Jon Gray, APG’s Annette Mosman and Temasek Holdings’ Dilhan Pillay Sandrasegara on the spot to commit to increasing their Canadian investments year over year by next year’s summit.”

But Carney needs to follow through on some promises to lock in that money, including a proposed new writeoff for investments the first year they are put to use into law, she said, combined with a move to cut Canada’s marginal effective tax rate on new business investment from 13% to 6.4% to be competitive with the United States.

What’s Carney’s sales pitch for his country? Stability and unity, Zi-Ann said, “which he’s pitching to investors as a tactical advantage over the U.S.”

The Liberal prime minister handed the baton to former Conservative Prime Minister Stephen Harper to close out the show, she said, and all the premiers of different political stripes were there. “This kind of political unity is a new spectacle after the last decade was marked by heated clashes between provincial and federal government that provided zero long-term policy certainty,” Zi-Ann said.

— Victoria Guida

LABOR

Wall Street and AI companies are facing a worker shortage when it comes to building the infrastructure that supports the industry’s continued expansion. New polling commissioned by BlackRock is raising the prospect that it might be time to think about education policy in that context.

The survey of 1,000 U.S. voters conducted by Public Opinion Strategies last month found that 93% support the U.S. adopting similar reforms to those announced by U.K. Prime Minister Andy Burnham earlier this summer that are designed to develop careers in skilled trades.

Those changes — Burnham’s government called them “fundamental changes” to England’s education system and curriculum, per our London colleagues — have been framed as a way for schools to tailor their curriculum to meet the needs of local employers. And they link core education for those 14 and older with training in skilled trade jobs.

John Kelly, BlackRock’s global head of corporate affairs, said that the “clear action for policymakers is to develop a national strategy to meet the demand” for skilled workers. The firm has ratcheted up its advocacy efforts around labor over the last year, including a pledge to spend $100 million through its foundation to promote workforce training and inking a partnership with North America’s Building Trades Unions.

Kelly told MM that the firm views this as part of a cultural shift around how the public views economic opportunities for people who aren't college graduates. A majority of those surveyed — 87% — said they agreed that a trade or vocational education leads to good-paying jobs in less time, and with less debt, than those requiring a college degree. And he added that he expects this to become a component of the economic policy conversations as candidates from both parties prepare for the 2028 presidential contest.

“Look, there's not a lot that the country agrees on these days, right?” he said. “But the one thing we know that they agree on is that vocational trades, the skilled trade pathway, is a great alternative for young Americans to build a career, build financial security and have family-sustaining jobs.”

Odds and Ends

Get ready — Securities and Commission Chair Paul Atkins unveiled the agency’s long-awaited and highly contentious plan to allow for the trading of tokenized stocks, Aiden Reiter and Declan Harty report. The proposal is the SEC’s first since the Senate shot down a controversial bill to regulate digital asset markets.

Canada — Trump’s immediate and draconian threat Wednesday to impose “serious tariffs” or cease trading with Europe if it admits Canada as an associate member underscores how seriously the administration regards efforts from other countries to band together and counter U.S. muscle.

Warsh, rinse, repeat — Congressional Republicans are holding fire on Federal Reserve Chair Kevin Warsh after the central bank raised short-term interest ahead of the midterms, Katherine Hapgood and Jasper Goodman report.

— One group that’s under the gun? Private equity. Higher rates “will deepen problems in their portfolios from a generation of buyouts that are stuck,” per the Wall Street Journal’s Matt Wirz and Mark Maurer.

The Big Story — From Katherine Long: OpenAI CEO Sam Altman, Nvidia CEO Jensen Huang and Qualcomm CEO Cristiano Amon plan to attend next week’s state dinner with Trump and Chinese leader Xi Jinping, four people familiar with the event told POLITICO.

At the regulators — The CFTC cleared the way for Native American tribes to jump into the prediction markets, per Declan.

— Michael Stratford reports that a major subprime auto lender has agreed to a nearly $710 million settlement with dozens of states to resolve allegations of abusive lending. The Trump administration walked away from a case against the company last year.

— Senate Banking advanced Trump’s nomination of Brian Johnson to lead the Consumer Financial Protection Bureau, Aiden and Katherine Hapgood report.

— The Federal Deposit Insurance Corp. has a new proposal to clarify how state laws impact banks chartered in other states, wading into a long-simmering battle on interchange fees, per Aiden.

Jobs report

Hannah Garden-Monheit is joining Lina Khan’s Center for Law and the Economy at Columbia Law School as its inaugural executive director. She is an FTC and Biden White House alum and most recently was a senior fellow at the American Economic Liberties Project.