The Federal Reserve’s Vice Chair for Supervision, Michael Barr, said that AI’s attractive traits present major risks. He signaled toward potential large-scale issues due to AI’s automation and speed.
On Tuesday, Michael Barr said generative AI could give rise to herding behavior and “the concentration of risk, potentially amplifying market volatility” despite the fact that financial regulators see huge opportunities in such emerging technologies.
Generative AI (GenAI) is different from other iterations of AI as it can generate content. Hence, it enhances productivity across various activities. Due to its fast adoption and rapid improvement, GenAI is slowly turning into a general-purpose tech.
Michael Barr discusses the risks of GenAI
Michael Barr referred to two scenarios for the evolution of GenAI. First, incremental adoption may make humans more efficient. In this case, GenAI tools will create a meaningful impact on people’s lives by automating their mundane everyday tasks.
In the second case, GenAI systems could rapidly make breakthroughs in energy, robotics, and biotechnology, resulting in the creation of new industries and reshaping of the existing ones. For instance, Generative AI could find cures for diseases that were previously incurable by enabling therapies that target mutated genes.
However, its automaticity, speed, and capabilities to optimize financial strategies could also pose risks to the markets.
Michael Barr added, “As GenAI agents will be directed to maximize profit, they may converge on strategies to maximize returns through coordinated market manipulation, potentially fueling asset bubbles and crashes.”
He also talked about nonbanks being more “risk-forward” when it comes to integrating AI into their systems, resulting in financial activities becoming less transparent.
According to Michael Barr, generative AI could negatively impact political institutions and the economy. Furthermore, it may concentrate political and economic power, where few individuals have greater control and a small group realizes most of the gains.
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