No two speculative booms are exactly alike, of course, but they share some common elements. Typically, there is great excitement among investors about new technology—in today’s case, A.I.—and its potential to boost profits for companies positioned to take advantage of it. In the twenties, commercial radio was a novel and revolutionary medium: tens of millions of Americans tuned in. Sorkin points out that, between 1921 and 1928, stock in Radio Corporation of America, the Nvidia of its day, went from $1 ½ to $85 ½.
Another hallmark of a stock bubble is that, at some point, its participants largely give up on conventional valuation measures and buy in simply because prices are rising and everybody else is doing it: FOMO rules the day. By some metrics, valuations were even higher during the late-nineteen-nineties internet stock bubble than they were in the late twenties. And according to the latest report from the Bank of England’s Financial Policy Committee, which was released last week, valuations in the U.S. market are, by one measure, “comparable to the peak of the dot-com bubble.” That’s true according to the cyclically-adjusted price-to-earnings (CAPE) ratio, which tracks stock prices relative to corporate earnings averaged over the previous ten years. If, instead of looking back, you focus on predictions of future earnings, valuations are less stretched: the Bank of England report noted that they remain “below the levels reached during the dot-com bubble.” But that’s just another way of saying that investors are betting on earnings growing rapidly in the coming years. And this is a moment when many companies have so far seen precious little return for their A.I. investments.
To be sure, not everyone agrees that stock prices have departed from reality. In a note to clients last week, analysts at Goldman Sachs said the market’s rise, which is heavily concentrated in Big Tech stocks, “has, so far, been driven by fundamental growth rather than irrational speculation.” Jensen Huang, the chief executive of Nvidia, whose chips power A.I. systems at companies such as OpenAI, Google, and Meta, said that he believed the world was at “the beginning of a new industrial revolution.” However, even the authors of the Goldman report acknowledged that there are elements of the current situation “that rhyme with previous bubbles,” including the big gains in stock prices and the emergence of questionable financing schemes. Last month, Nvidia announced it would invest up to one hundred billion dollars over the next decade in OpenAI, the parent company of ChatGPT, which is already a big purchaser of Nvidia’s chips and will likely need more to power its expansion. Nvidia has said OpenAI isn’t obligated to spend the money it invests on Nvidia chips, but the deal, and others like it, have sparked comparisons to the dot-com bubble, when some big tech companies engaged in so-called “circular” transactions that ultimately didn’t work out.
Another recurring feature of the biggest asset booms is outright chicanery, such as fraudulent accounting, the marketing of worthless securities, and plain old stealing. Galbraith referred to this phenomenon as “the bezzle.” In hard times, he noted, creditors are tight-fisted and audits are scrupulous: as a result, “commercial morality is enormously improved.” In boom times, creditors are more trusting, lending standards get debased, and borrowed money is plentiful. But there “are always many people who need more,” Galbraith explained, and “the bezzle increases rapidly,” as it did in the late twenties. “Just as the boom accelerated the rate of growth,” he went on, “so the crash enormously advanced the rate of discovery.”
Sorkin traces the fates of Albert Wiggin and Richard Whitney, who, at the time of the crash were, respectively, the C.E.O. of Chase National Bank and the vice-president of the New York Stock Exchange. Both men were involved in the failed effort, orchestrated by Lamont, to stabilize the market. In 1932, Wiggin went on to become a director of the Federal Reserve Bank of New York. But, during the Pecora investigation, which began that same year, it emerged that, beginning in September of 1929, Wiggin had secretly shorted the stock of his own bank, using a pair of companies he owned to make the trades. He was forced to resign from the Fed. In 1930, Whitney, the scion of a prominent New England family, became the president of the stock exchange, but he was ultimately exposed as an embezzler and served more than three years in Sing Sing.
On being reminded of stories like these, it’s tempting to cast the leaders of nineteen-twenties Wall Street as a bunch of crooks. Sorkin resists the impulse. In an afterword, he writes, “The difficulty is that, other than the disgraced Richard Whitney and Albert Wiggin, it is hard to make the case that any of the era’s other major financial figures did anything appreciably worse than most individuals would have done in their positions and circumstances.” Given the role that Wall Street’s élite played in inflating and promoting the bubble, this is either a generous view or a jaded commentary on the fallen nature of mankind. In any case, though, it’s true that speculative booms tend to take on a life of their own, creating incentives and opportunities that warp people’s judgment at all levels of the economy, from small investors and professional intermediaries to major corporate and financial institutions.
One aspect of the current boom that hasn’t received sufficient attention is how it has extended from the stock market to the credit markets, where there has been enormous growth in so-called “private lending” by non-bank institutions, including private-equity companies, hedge funds, and specialized credit firms. Last week, news organizations reported that the Department of Justice had opened an investigation into the collapse of First Brands, an acquisitive Cleveland-based auto-parts firm that, with Wall Street’s help, had apparently raised billions of dollars in opaque transactions. One creditor told a bankruptcy court that up to $2.3 billion in collateral had “simply vanished,” and called for the appointment of an independent examiner. A lawyer for First Brands said the company denied any wrongdoing and attributed the collapse to “macroeconomic factors” beyond its control.
The sudden demise of a single highly leveraged company that operated in a sector far from the A.I. frontier may be a one-off event, with no broader implications. Or it could conceivably be a harbinger of what lies ahead. We won’t know for a while—perhaps a good while. But in the words of the nineteenth-century English journalist Walter Bagehot, whom Galbraith quoted, “every great crisis reveals the excessive speculations of many houses which no one before suspected.” This time is unlikely to be different. ♦
