On October 7, 1974, 850 federal officials quietly checked into motel rooms in six communities in the New York City borough of Queens and the Long Island suburbs.
The next afternoon, they gathered in small groups near the 104 branches of Franklin National Bank, the nation’s 20th largest bank. “‘We began getting calls at about 1:30 or 2 PM from branch managers who said they had spotted some suspicious people congregating outside,’ said Arthur G. Perfall, a senior Franklin vice president. ‘Our security people began checking out the calls, but we soon realized something was up more than a massive holdup.’”
Something was up: Minutes before the bank branches closed at 3 PM, the feds entered, flashed their credentials and said they were conducting a routine bank examination, as Newsday’s business editor Daniel Kahn wrote later that year. But after 3 PM, they declared their true intentions, assuming control of the branches and ordering the managers to turn over the keys.
“At one branch,” Kahn wrote, “a man jumped onto his desk and shouted, ‘I win the pool!” Most employees knew of the bank’s losses but had no idea how bad things had gotten.
The collapse of Franklin National Bank, which once had $5 billion in assets, was the largest bank failure in American history to that point. An innovator in the industry, Franklin pioneered drive-up windows, certificates of deposit and bank credit cards, as John Steele Gordon wrote for the ABA Banking Journal. “It grew into a major bank after World War II, thanks to the great growth of the Long Island suburbs,” Gordon noted. But then it started making highly risky loans.
The Federal Reserve Bank arranged for another bank to take over Franklin’s assets and plowed $1.4 billion into the deal to keep all depositors whole, even those who had more than the FDIC’s insurance would normally have covered. But the bank’s shareholders were wiped out.
Hiring hitmen
Some of Franklin’s top executives pled guilty or were convicted of federal charges relating to the failure. And in 1980, Franklin’s onetime controlling shareholder Sicilian-born financier Michele Sindona was convicted of fraud and conspiracy in a U.S. court.
A former financial adviser to the Vatican, Sindona would also be found guilty in 1986 of paying $40,000 to hitmen for the murder of lawyer Giorgio Ambrosoli, who had documented Sindona’s fraudulent management of his Italian banking empire.
Two days after receiving a life sentence in Italy, the jailed Sindona died of cyanide poisoning. Whether it was suicide or murder has never been established. “They are afraid that I could reveal some very delicate information that they don’t want divulged,” Sindona said, as he was dying.
In the decades since the collapse of Franklin National Bank, we’ve become accustomed to sudden events that have shaken the economy and markets: among them, the 1980s savings and loan crisis, the 1998 collapse of the hedge fund Long-Term Capital Management, the 2000 dotcom crash, the 2008 global financial crisis, the Covid-19 pandemic and the 2023 failure of Silicon Valley Bank.
But each time confidence has been shaken, the White House and the Fed have taken steps to restore it. Optimism soon flowers again. And the economy’s winners take it further, promising a future of huge gains.
‘So bright’
In September 2024, Sam Altman, chief executive of ChatGPT’s parent, OpenAI, wrote on his blog:
“I believe the future is going to be so bright that no one can do it justice by trying to write about it now; a defining characteristic of the Intelligence Age will be massive prosperity.”
“Although it will happen incrementally, astounding triumphs — fixing the climate, establishing a space colony, and the discovery of all of physics — will eventually become commonplace. With nearly-limitless intelligence and abundant energy — the ability to generate great ideas, and the ability to make them happen — we can do quite a lot.”
Prophets of immense future riches have always existed. In 1840s Britain, the hot new industry wasn’t AI, but railroads. “Railway firms aggressively pushed their own shares—particularly in newspapers, the new media of the age,” notes a post by Focus Economics. “In late 1845, railway ads covered over half the space in many papers. Such ads were awash with inflated claims, optimistic revenue projections and questionable accounting practices, whipping up euphoria among investors.”
“Even the likes of Charles Darwin and the Brontë sisters were swept up by the hype. Private firms hatched grandiose investment plans, submitted hundreds of bills to parliament for new railway lines, and saw their share prices roughly double in the space of a few years.”
At one point, 7% of Britain’s GDP was being spent on building railroads. But the bubble eventually burst — and share prices collapsed. One writer notes that it was the greatest technology mania in history, even larger than the dotcom craze of the late 1990s.
Our big bet
What’s especially worrisome right now is the way in which the prospects for the U.S. economy and stock market rely heavily on a bet on the future of the artificial intelligence industry, just as 1840s Britain bet almost everything on railroads.
As far as growth is concerned, much of the rest of the U.S. economy has been sidelined, as business leaders try to figure out how President Donald Trump’s chaotic tariff regime will play out. Job growth has sputtered out. Another indicator of a slowdown ahead: lumber future prices are falling.
While the stock indexes are at or near record highs, roughly a third of the money invested in S&P 500 stocks is now concentrated in just seven companies: Alphabet (Google’s parent), Amazon, Apple, Google, Meta, Nvidia and Tesla. (This is not investment advice.)
The risk of this all-in bet on AI should worry the Trump administration, since the president has publicly allied himself with the big tech companies. Last week at a self-congratulatory White House dinner, Altman told Trump:
"Thank you for being such a pro-business, pro-innovation president. It's a very refreshing change. I think it's going to set us up for a long period of leading the world, and that wouldn't be happening without your leadership."
The latest monthly job reports have shown anemic growth. As Paul Kedrosky pointed out, the bright spots in the Fed’s “Beige Book,” its summary of reports on regional economies, mostly stem from the construction of data centers for AI.
McKinsey predicts that it will take nearly $7 trillion in new spending on data centers worldwide by 2030 to keep up with the demand for “compute” — the processing capability required for AI and other enterprise computer functions.
The giant tech companies are investing hundreds of billions in the AI arms race. But for all of the accomplishments of the large language models (LLMs) that can pass AP bio exams, diagnose rare medical conditions and write an email to your credit card company, the true business case for AI is proving elusive.
The problem with AI
The revenue flowing to AI companies is a small fraction of the amount they’re spending to train and run their LLMs. Businesses that use AI tools aren’t yet seeing massive gains in productivity or the ability to meaningfully replace humans with machines. And if they were able to do the latter, that could prove to be a massive political and economic problem for the country.
“Time and again,” wrote David Gray Widder and Mar Hicks in November 2024, “AI has been crowned as an inevitable ‘advance’ despite its many problems and shortcomings: built-in biases, inaccurate results, privacy and intellectual property violations, and voracious energy use...”
“AI has been publicly presented as unstoppable,” noted Widder and Hicks. But this is a common “stage in the development of many technologies, where a technology’s manufacturers, boosters, and investors attempt to make it indispensable by integrating it, often prematurely, into existing infrastructures and workflows, counting on this entanglement to ‘save a spot’ for the technology to be more fully integrated in the future.”
Venture capital firm Sequoia Capital said that “the AI bubble is reaching a tipping point” and tech firms hadn’t answered the question: “Where is all the revenue?”
“Similarly, in Goldman Sachs’ recent report, Gen AI: Too much spend, too little benefit?, wrote Widder and Hicks, “their global head of equity research stated, ‘AI technology is exceptionally expensive, and to justify those costs, the technology must be able to solve complex problems, which it isn’t designed to do.’ Still, the report tellingly notes that even if AI doesn’t ‘deliver on its promise,’ it may still generate investor returns, as ‘bubbles take a long time to burst.’”
Indeed this bubble may last for months or years. But if the profits don’t start to materialize, the AI spending boom will eventually have to stop.
Unorthodox thinking
In 1975, the year after Franklin National Bank failed, an unheralded economist published a book questioning the rosy view many of his colleagues took of capitalism’s smooth functioning. Hyman Minsky sought to correct what he viewed as a widespread misreading of John Maynard Keynes, the British economist who stressed the importance of government spending to prevent depressions.
Minsky argued that Keynes recognized that capitalism is inherently unstable. His brother and sister economists had banished the factor of uncertainty from their interpretation of Keynes; but Keynes without uncertainty, Minsky wrote, is like performing the play Hamlet “without the prince.”
The 30 years after World War II were an unusually blissful period in the American economy, Minsky agreed, but they weren’t at all representative of almost all other 30-year cycles.
“In the entire history of the United States from the days of Washington to the days of Franklin D. Roosevelt,” Minsky wrote, “no span of thirty years can be found without some serious depressions and disturbing financial traumas.”
Those “disturbing financial traumas” started to come roaring back around the time Minsky was communicating his ideas.
A “Minsky moment” is a periodic crisis of capitalism, in which a bull market is suddenly brought down by a big fall in asset prices. People lose confidence in the safety of their savings and investments as their risky bets begin to look foolish.
The Federal Reserve’s decision to rescue the depositors of Franklin National Bank averted a “Minsky moment.” In 2008, the Fed’s decision not to rescue Lehman Brothers created one.
Writing of Keynes, Minsky observed:
Implicit in his analysis is a view that a capitalist economy is fundamentally flawed. This flaw exists because the financial system necessary for capitalist vitality and vigor — which translates entrepreneurial animal spirits into effective demand for investment — contains the potential for runway expansion powered by an investment boom…stability, even if it is the result of policy, is destabilizing.
Why Trump wants to control the Fed
A period of economic stability inevitably creates instability: when entrepreneurs, bankers and investors are convinced that good times will last forever, they feel empowered to take outsized risks.
Some of those gambles will eventually blow up. Then governments are faced with a choice: To avoid a recession or depression, they have to flood the economy with government spending and/or become the lender of last resort to shaky banks or other lending institutions.
All of this provides context for Trump’s crusade to usurp the independence of the Fed. On Tuesday, a federal judge paused his attempt to fire Fed governor Lisa Cook.
If he ultimately gains control, the president can make sure interest rates will be low enough to enable borrowers to extend and increase risky loans.
Perhaps more importantly, Trump can dictate whether the Fed will bail out companies and their investors. The vast resources of the federal financial regulatory agencies can be used to shut down banks or allow them to skate through financial challenges.
Trump can decide to save the next Lehman Bros.—or let it fail if its executives aren’t sufficiently loyal and grateful to him.
The self-proclaimed “King of Debt” will also be the monarch of Minsky moments.