Veteran Economists Who Predicted Past Crashes Warn AI Bubble Could Burst Soon

The Prophets of Doom Are Speaking Again

Baker is among a select group of people with track records of foreseeing major economic train wrecks. Dean Baker has earned a reputation for predicting economic catastrophe, and he tries to follow his own advice. After the economist warned of a stock bubble in the late 1990s, he rebalanced his investments to reduce exposure to the market. Several years later, he became concerned that soaring home values would fall to earth, so he and his wife sold their condo in Washington. He was right both times: The dot-com bubble burst in March 2000, and D.C.-area home prices crested in 2006 before slumping toward the depths of the Great Recession in 2009.

Now Baker, who's a distinguished senior fellow at the Center for Economic and Policy Research, has that foreboding feeling again. Investment in artificial intelligence has propelled the stock market to record highs, but he's shifting his investments to be less exposed to what he considers to be an AI bubble edging closer to popping. These proven prophets of doom are winning attention in online posts and media interviews, as more people begin to wonder if the AI boom is too good to be true.

Baker isn't alone in his concerns. Michael Burry, whose mid-2000s bet against the housing market inspired Michael Lewis' 2010 book The Big Short, triggered headlines across financial news outlets in November when his hedge fund made moves suggesting caution about AI investments. These economists share a pattern of seeing warning signs that others dismiss as pessimism.

Historical Parallels and Warning Signs

Today's rush to build AI data centers also reminds Odlyzko of the 19th-century railway mania in Britain, a bubble of speculation on new railroad infrastructure. Both frenzies are creating "big infrastructure … that's actually drawing on other parts of the economy," he said. Chanos makes comparisons between today's AI fever and the 1990s tech boom, as both bull markets have centered on big ideas: AI today and the internet's beginnings decades ago. In the short term, many early internet businesses cratered, even though the technology worked out in the longer term. Artificial intelligence technology "is real and probably will be very important, but lots and lots of companies that claim they're a great business … are probably not going to be great businesses," Chanos said.

A tech-fueled surge in share prices over recent years has driven the total value of the stock market to far outweigh U.S. economic input, an imbalance that has come before previous downturns. A 2020 study of postwar financial crashes around the world by economists at Harvard, the National Bureau of Economic Research and the Copenhagen Business School found that "crises are substantially predictable." When credit and asset prices grow rapidly in the same sector - conditions the researchers term a "red zone" - there was a probability of about 40 percent of a financial crisis starting in the next three years, they concluded.

A 2025 Harvard and Copenhagen Business School study of the beliefs of market experts during periods of boom and bust suggests that questioning market optimism is a good idea. "Optimism portends crashes: the most bullish forecasts predict the highest crash risk," the authors found. In most cases, the authors said, "optimism remained unchecked until well after the crash."

The Counterargument and Market Realities

But a report issued Jan. 9 by Goldman Sachs Research said many features of past bubbles are absent. … Corporate debt is relatively low in historical terms, and most of the S&P 500's 18 percent returns last year came from increased profits, not investors marking up valuations, the report said. Double-digit earnings growth is "providing the fundamental base for a continued bull market," wrote Ben Snider, chief U.S. equity strategist. The report forecast that U.S. stocks would continue to grow in value this year.

What's different is that it's now much easier for retail investors to jump into the stock market with the rise of stock-trading apps like Robinhood. This accessibility means more people could be affected if these predictions prove correct. Baker is one of those retail investors who's preparing for the worst, as he has before - although he hasn't always had perfect timing. He pulled back his portfolio a couple of years before the dot-com bubble burst in March 2000 and sold his D.C. condo in 2004, about two years before home prices started falling in the region.

A Different Perspective on Economic Collapse

Although discussion about predicting market slumps often frames the events as bad, Baker thinks an AI crash could do the U.S. some good. A slump could lead to a reallocation of resources in the economy, perhaps toward other sectors like manufacturing or health care, he said. "There's all sorts of things you could better use those resources for if the AI really doesn't make sense," Baker said.

This perspective challenges the conventional wisdom that market crashes are purely destruct