> The federal government responded to the 2008 crisis by limiting the ability of traditional banks to take on big, risky loans. Since then, however, private-equity firms, which aren’t subject to the same regulatory scrutiny as banks, have gotten more heavily into the lending business. As of early this year, these firms had lent about $450 billion in so-called private credit to the tech sector, including financing several of the deals discussed above. And, according to one estimate, they will lend it another $800 billion over the next two years. “If the AI bubble goes bust, they are the ones that will be left holding the bag,” Arun told me.

> A private-credit bust is almost certainly preferable to a banking bust. Unlike banks, private-equity firms don’t have ordinary depositors. In theory, if their loans fail, the groups that will be hurt the most are institutional investors, such as pension funds, university endowments, and hedge funds, limiting the damage to the broader economy. The problem is that nobody knows for certain that this is the case. Private credit is functionally a black box. Unlike banks, these entities don’t have to disclose who they are getting their money from, how much they’re lending, how much capital they’re holding, and how their loans are performing. This makes it impossible for regulators to know what risks exist in the system or how tied they are to the real economy.

> Evidence is growing that the links between private credit and the rest of the financial system are stronger than once believed. Careful studies from the Federal Reserve estimate that up to a quarter of bank loans to nonbank financial institutions are now made to private-credit firms (up from just 1 percent in 2013) and that major life-insurance companies have nearly $1 trillion tied up in private credit. These connections raise the prospect that a big AI crash could lead to a wave of private-credit failures, which could in turn bring down major banks and insurers, Natasha Sarin, a Yale Law School professor who specializes in financial regulation, told me. “Unfortunately, it usually isn’t until after a crisis that we realize just how interconnected the different parts of the financial system were all along,” she said.

A lot of people lost money when YHOO tanked in 2000, but the money they lost generally hadn't been lent to them by a bank, which is why 2000 was a tech crash and not a finance crash. I generally think of private equity as a rich guy gambling with a wealthy guy's money, but to the extent that the last ten years of growth have made private equity seem safe enough for banks and pensions to invest in, a correction caused by AI companies failing seems a lot scarier.