“An AI Bubble Could Burst, While Regulators Stand Idle”

Former South Korean minister Hong Jong-hak says the artificial intelligence investment boom could end in a financial disaster greater than the 2008 global crisis, yet he believes regulators are failing to prepare.

Hong, who served as minister of SMEs and Startups, has warned since last year through social media and newspaper columns that rising AI investment could become a financial crisis. He told Hankyoreh that warnings had already emerged in the United States and Europe, but South Korean society remained unprepared. “The AI bubble has a high chance of bursting,” he said, adding that the consequences could exceed those of the global financial crisis.

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The AI bubble has a high chance of bursting, and if it does, it will be a disaster surpassing the global financial crisis.

He identified three main warning signs in the U.S. market. First, he said history showed that bubbles often grow around highly innovative technologies, citing railroad, radio and dot-com investment booms. Second, he criticized the financing structure surrounding the sector. Nvidia invests in customers that then buy Nvidia products, creating what he called a cycle of vendor financing. Meta and other companies also use special-purpose vehicles to move debt off their balance sheets.

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The watchdogs are completely paralyzed. It is a situation where the warning lights have been switched off.

Hong compared these structures, despite their different scale, with circular ownership and mutual payment guarantees among South Korean conglomerates before the 1997 foreign-exchange crisis. He also said much of the money reaching private AI companies such as OpenAI and Anthropic flows through private lending involving insurers and pension funds rather than banks. In his view, regulators do not even know the size of that exposure.

He described South Korea’s financial watchdogs as “completely paralyzed” and said institutions created after the 1997 crisis had failed to perform their role as sentinels. His immediate recommendations are to establish continuous monitoring by institutions including the International Finance Center and the Korea Development Institute, require lawmakers to determine the National Pension Service’s exposure to U.S. private lending, and pursue currency swaps with the United States and Japan.

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With just a little more attention, we could minimize the damage, but South Korean society is still completely unprepared.