The Bigger Shitpile

Who Holds the Bag?

Twenty years ago, when I switched from doing a newsletter to a blog, I wrote about the “big shitpile.”

It was a game of circular financing. Bad mortgages were written and, instead of being classed as junk, “insurance” was used to reclassify them as AAA paper. Then new housing loans were made on the bad paper. There wasn’t enough money behind the insurance to make losses good once they appeared. Speculators taking the mortgages were betting that rising house prices would make them whole before their bad credit got them into trouble.

Something similar is happening now in Big Tech. Data center builds are being “financed” by promises from customers like OpenAI. That’s the “insurance.” It’s people buying stock who are like those old homebuyers, praying the structure doesn’t fall on them.

The fake orders feed stock prices that act as collateral for loans to build the data centers. When the collateral goes bad the bankers financing the bubble start asking questions.

They’re asking questions right now. But they’re not serious about it.

Back in 2008, the banks behind the big shitpile were bailed out. The Bush Administration told the incoming President the economy would collapse unless he signed on to the bank bailout. He signed on. Banks stopped crashing.

That’s what encouraged today’s AI Gods to run the play again. Only bigger, so there will be no doubt about their need for a bailout, no way they could be punished for wrecking the economy.

The Icelandic Example

Iceland offers another way to handle this.

We were busy with our own trouble at the time, but Iceland had a crisis, with similar criminal causes, that was even larger than that of the United States, in relative terms. Its banks were 9 times the nation’s gross domestic product when they failed.

Instead of getting a bailout, however, the banks were allowed to fail. The government took them over. Shareholders and foreign creditors took the losses rather than Icelandic savers.

It wasn’t pain free. Europeans who were on the hook for losses froze Iceland out. The Icelandic currency became worthless for a time. The local stock market fell 90%. There was a severe recession. The government could not borrow money, and its credit rating collapsed.

But deposits were protected and, after a few years, the economy began to grow again from its lower base. Iceland joined the European Union in 2009, and by 2012, its economy was considered a success story.

Refusing to bail out the people who cause the problem is the lesson here. No one was punished for the U.S. financial crisis, which encouraged others to do the same in our time, only bigger.

When tech suffers a real estate collapse, and it will, conservatives will continue to argue that the AI Gods are too big to fail. They will be joined by mainstream Democrats, fearful of the economic consequences of America trying to discount its debt. But if you can’t write off debt, if you’re really “too big to fail,” we now know you’ve blown a hole in your system that cannot be repaired.

Elon Musk, Sam Altman, and Mark Zuckerberg are not too big to fail. No one is. Remember that when the time comes.