NYU Professor Damodaran warns: An AI crash would be more painful than the dot-com bust
What it really says
Aswath Damodaran, finance professor at New York University's Stern School of Business and known as the 'Dean of Valuation,' has warned in a podcast interview with Meb Faber about the particular risks of the current AI investment bubble. His core argument: unlike the dot-com era, which was almost entirely equity-funded, a large portion of today's AI investments flows through debt - and this debt increasingly comes from private capital rather than banks. Goldman Sachs estimates total capital expenditures by major cloud providers (hyperscalers) for the 2025-2027 period at $1.15 trillion - more than double the previous three years. Damodaran emphasizes: 'The amount of money put into AI is immense, which means that when the correction comes, the pain will be more intense.' The critical problem is the transition from stock price losses to credit defaults: while a dot-com crash primarily hit shareholders, a debt-financed AI crash would cause credit defaults that spill beyond the technology sector into the broader economy. 'There's a very real chance that if there's a correction and companies start having problems, that problem is going to show up as distress and default, and that really doesn't stay restricted. It spills over into the rest of society.'
Our assessment
This warning warrants a yellow rating because Damodaran is a respected financial expert whose analysis is based on verifiable economic facts - but a crash is not a certain scenario. The legitimate concern: AI investments are indeed unprecedentedly high and increasingly debt-financed. The $1.15 trillion in hyperscaler spending through 2027 is a real figure from Goldman Sachs. And the mechanism Damodaran describes - debt financing converting stock market losses into credit defaults - is historically documented. At the same time, there are significant counterarguments: unlike many dot-com products, AI technology already delivers measurable economic value. Major cloud providers like Microsoft, Google, and Amazon, unlike dot-com startups, have solid business models and can finance AI investments from ongoing revenue. Damodaran himself compares the AI boom to the automobile industry 100 years ago - there was also a crash then, but a transformative industry emerged long-term. The warning should therefore be taken seriously as a risk scenario, but is not cause for panic.
Relevance for Germany
Damodaran's warning is particularly relevant for Germany because the German economy is closely linked to the global technology supply chain. German industrial companies are currently investing massively in AI infrastructure: SAP, Siemens, and the automotive industry are betting billions on AI-powered products and processes. Should an AI correction occur, German mid-sized companies serving as suppliers of AI hardware and infrastructure would be directly affected. Additionally, the German government has allocated billions in funding through its AI strategy. European banking is connected to the global tech sector through credit relationships - a debt-financed crash in the US could spread to Europe through these channels. At the same time, the analysis shows why the European regulatory approach of the EU AI Act may also serve as an economic safeguard: stricter rules may prevent uncontrolled market overheating.
Fact check
Damodaran's statements come from an interview on the Meb Faber Show podcast ('The AI Spending Spree: Bubble, Boom, or Both?', Episode 619). The analysis was independently reported by The Decoder, OfficeChai, and Inshorts. The Goldman Sachs estimate of $1.15 trillion in hyperscaler investments (2025-2027) is a published analyst forecast. Damodaran's reputation as the 'Dean of Valuation' is well-established in the financial world - he is a professor at NYU Stern School of Business and author of several standard works on corporate valuation. The distinction between equity funding (dot-com) and debt funding (AI) is his central, verifiable argument.
Source
- • https://the-decoder.com/nyu-finance-professor-damodaran-warns-an-ai-crash-could-hit-harder-than-the-dot-com-bust/
- • https://www.themebfabershow.com/episodes/oILab0ZBVxs
- • https://officechai.com/ai/history-suggests-there-would-be-an-ai-bust-and-it-would-be-more-painful-than-the-dot-com-bust-ashwath-damodaran/
- • https://inshorts.com/en/news/-dean-of-valuation--damodaran-warns-ai-bubble-burst-may-hurt-more-than-dot-com-crash-1781939388347