This post was originally published on this site.
The Biggest Issues in Finance
Dan Loney: Recently, the Wharton School hosted its Future of Finance Forum. The one-day seminar discussed a wide range of topics at the forefront of the conversations going on right now, including the path of the Fed, AI in finance, and the economic impact in conflict. We’re joined right now by Joao Gomes and Itay Goldstein, professors at the Wharton School who were the leads at the event. Gentlemen, great to talk to you again, as always.
Joao Gomes: Thank you, Dan. Great talking to you.
Itay Goldstein: It’s great to see you.
Loney: I’ll start out with both of you, and Joao, I’ll let you go first. What is it about this conference in this time that makes it important right now, do you think?
Gomes: I think finance is a super exciting field at this moment. I think it’s something where Wharton has a unique advantage of being able to put together, obviously great faculty, but also a distinguished group of alums and students, even, that were at the conference to benefit from some of these lessons. And of course, Penn Washington is a fantastic facility. A lot of what’s exciting in finance is happening in Washington right now with deregulation and thinking really big about the future. Particularly, I think, in AI, in private markets, in stable coins, digitalization. But also, a lot of the scary stuff. A lot of concerns about geopolitics you mentioned, but also the debt. What’s happening with the Fed? There’s a lot of really meaningful conversations. And so this conference is a great opportunity to to put together a lot of people to think about it as we go into 2026. What is it ahead? What are the challenges? But also, a lot of exciting opportunities.
Loney: Itay, what draws your attention right now?
Goldstein: We had panels on issues that are currently on the agenda, and it was striking to see how crucial each one of them is. We started by talking about the future of money, because of all this push to crypto and stablecoin and digital deposits and things like that. And then we talked about the Fed, the future of the Fed. Because clearly there is a lot going on at the Fed right now. I led a panel on AI, and we had other panels on the debt, the public debt, private assets, things like that. When you’re looking at each one of these topics on its own, it seems like this is just crucial for the development of the financial system and the development of the economy. And then when you put it all together, you realize how big this moment is. There are really a lot of things that are happening.
Loney: Your panel was about AI. Obviously, artificial intelligence is discussed in almost every conversation in every sector right now. Where does AI in the world of finance stand at the moment?
Goldstein: The thing about AI is, it is not really originating from finance, right? I mean, we had a fintech revolution over the last two decades, where there were a lot of innovations that came out of finance. Blockchain, crypto, things like that, kind of trying to decentralize the financial system. The thing about AI is, it kind of builds on top of that. It’s not originating from finance. As you say, we hear about it everywhere. I would say here, finance is just one of the sectors in the economy that is affected by AI, just like all the other sectors.
However, it is important to note that the effect on finance is probably bigger. There is some data that supports that. And this is because, in general, people in finance make a higher wage on average, and AI is affecting people of higher wages. So it is affecting finance more. And it is really broad. If you think about all the applications in finance, it affects asset management, it affects credit and insurance, it affects trading. It even affects regulation of finance. Really, everywhere you look, AI is affecting the way that finance is being done.
Loney: The subhead of your group was “Opportunities and Risks.” I think a lot of people obviously believe there’s a great opportunity here, but they also realize that there can be risks associated with this as well.
Goldstein: Yeah, absolutely. I think there are huge risks. And I have emphasized some of this in my own research, and I think I talked to you about it before. But really, what we were looking at is thinking about algorithms that are trading on their own in financial markets, which is something that we increasingly see, and how AI is deployed to help them figure out the strategy. Basically, you’re using reinforcement learning for these algorithms to figure out on their own what they should do, how they should trade, how they should optimize over time. And you get all sorts of interesting interactions among them that potentially lead to reduced competition, potentially lead to financial fragility. Those are certainly things that I think regulators should worry about when it comes to risks in the future financial system.
Loney: Joao, when you talk about the world of finance, I think a lot of people also have the question of, how is it going to impact our currency? We obviously have cryptocurrency, but will we get to a point, at some point down the road, where we actually see something like a digital dollar?
Gomes: I think that’s the one topic where I think the general consensus was, no. I don’t think so. And I think I agree with that. I think that the Fed has been very mindful of the political sensitivity of introducing a digital dollar. I think there’s no popular support for that, largely because of concerns about privacy. That’s not to say they will not happen in different countries, that they will adopt central bank digital currencies, but I think in the U.S. that’s very far into the future, if ever. I think what we’ll have is a continuous push towards having more privately-issued forms of what I’m going to call “money” or “deposits.” And how do we ensure that those things remain relatively stable? They provide access, they democratize access to capital markets, potentially, in many different ways, particularly private capital markets. I think that was a really interesting conversation we had. But how do we make sure we have enough stability, enough predictability, enough safety rail guards around it to make sure that even in times of great distress— like what we had in 2008 or 2021— those assets remain very liquid and very marketable and provide the safety that people need?
The Future of the Fed
Loney: Since you brought up the discussion of the Fed, we might as well dive into that next, because certainly the Federal Reserve is drawing a lot of attention these days from all fronts. How do you view the path of the Federal Reserve, Joao, right now? And I think there are concerns about where it could potentially be headed in the future.
Gomes: Sure, great concerns. I think it Itay will have a lot to say about that too. I think what I like to say about the Fed is, I think we are sitting here in the United States and thinking a lot about the Fed. I think a lot of these problems are really global. Every country in the world is facing them. And I think independence is something that we cherish very much in the United States. It sort of dominated the debate.
I would say that regardless of what we think about independence, per se, I think there’s a lot of realities about rising debt and external pressures, competitive pressures from other countries. There [are] real challenges to how central banks can operate and the environment in which they can operate. We like to talk a lot about the fact that debt is going to explode, and that’s going to constrain what central banks can do everywhere. You see it in Japan right now. And I think Japan is a great example of how you take the U.S. environment, take the president, Jay Powell, out of the conversation, and you still have the same exact issues facing other parts of the world.
I think the Fed is both a challenge and an opportunity. It was definitely one of the most entertaining discussions we had, as you can imagine. It was very timely. And I think the Fed has a lot of big judgment calls to make, a digital dollar being one. Regulation of the financial system, oversight of the financial system, how much the Fed cares about financial stability — I think this is a leg of monetary policy being very much ignored in the past, and is going to rise in importance as we go forward. There’s a lot of judgment calls, and competence, which is not a word that we hear enough when we talk about the Fed, is going to be much more important than, I think, independence, in my opinion.
Loney: Itay, how do you view the path of the Fed right now?
Goldstein: I agree with what Joao said, generally. I think there are the long-term issues, and there are some of the short-term issues. I think what we see here in the U.S. right now is all this pressure around the Fed independence. I came out of the panel discussion a little encouraged in the sense that I do think people were looking at it in perspective and saying, you know, at the end of the day, there is enough stability in the institution that will help it navigate forward despite all these pressures. It’s not that easy to put in someone in the FOMC that is just acting completely on behalf of someone else. And we had people there that were previous Fed presidents and Fed governors. And I think overall, I came out thinking, well, hopefully we can sustain that.
But yeah. I mean, the path forward has a lot of issues that need to be thought about. And I agree with the point about the tension between monetary policy and financial fragility in the economy at large. And I think these are issues that the Fed has to debate going forward.
The Impact of Global Conflict
Loney: Obviously, global conflict was one of the things that you talked about, Joao. There’s certainly a lot of different events going on right now. Obviously, Russia, Ukraine, Israel, and Gaza. Venezuela, what we’ve seen go on there. How are these events having an impact on the world of finance right now?
Gomes: I think the biggest impact is indirectly, is on the dollar and the financial system. Fragmentation of the financial system and of currencies. I think that’s been very obvious. Certainly has had more impact on some of these countries, like Russia, India, China and so on, than it has on us.
I think the conversation was interesting because we talked a little bit about how countries are preparing themselves or insulating themselves from potential sanctions in the future, to prepare for future conflict. That was a really interesting, and a little disturbing but unavoidable part of the conversation. I think that is something that is not good for the economy at large, for financial markets at large. Fundamentally, it’s going to make it harder for us to to grow as an economy, as a world economy, because we cannot tap that sort of large pool of resources we used to just five years ago or 10 years ago. So that fragmentation is important.
Does that impact the dollar? Does that impact the U.S. financial system? I think the U.S. financial system is mostly insulated, with the exception of the U.S. sovereign debt market, which depends a lot on external capital flows. But does it impact the dollar as the world’s reserve currency? That is a conversation that is going to continue for years.
Loney: So Itay, for part of your conversation — I know you and I have talked about this in the past — is AI and regulation. And with the conflict that’s going on, how much concern is there about AI as a tool that can be used by bad actors, that can have an impact on the financial sector as we move forward?
Goldstein: I think there is huge concern about that. It didn’t come up so prominently in the panel. But I think if you talk to other people in other contexts, this is something that people think about. I mean, first of all, it doesn’t have to be bad actors to create a lot of damage. So you could take your hedge funds of today, and the financial institutions, financial traders, and they start using those AI algorithms, and those AI algorithms just create some damage. It might be that this is something that is not intended, and can still create damage.
But as you point out, there is also a concern about bad actors that can potentially use the U.S. financial system, or any other financial system, to create damage. So what prevents someone from just deploying an AI algorithm and trying to manipulate financial markets? Especially these days with the rising prominence of prediction markets, which is a topic we didn’t touch on so much, but I think is quite important. But with prediction markets, you can more easily manipulate them. And full prediction markets have an effect on mainstream financial markets. When you couple that with AI algorithms, I think there is quite a lot to think about.
Loney: Joao, I know you led the discussion on the issue of debt. What was the general consensus on dealing with what has been, at least from the U.S. side, just a massively growing level of debt that we have?
Gomes: Frustration.
Loney: Yeah.
Gomes: Enormous frustration. I think people feel that we don’t care enough about this. And I was trying to understand why not, and what can change that. And I think — what I like to say — that was, without question, the issue. I think people don’t understand why this is important. Clearly, people at large, voters. Let’s put it this way. Politicians, as a result. [I’d] like to emphasize this. If this government continues to ask for $2 trillion a year, we’re not going to have enough resources to do all the exciting things that we talk about. There’s just not going to be enough to keep up on AI investments, on digitalization and so on. There’s just not going to be enough resources. And I think if we don’t address that, all these rosy pictures we have about the future don’t come to fruition. So there’s a lot of frustration.
Loney: Let me finish up with this as kind of a wrap up of the conference. And Itay, I’ll start with you. When you think about all that was discussed during this seminar, what do you hope came from it? Is there one theme that you left that maybe is sticking with you as you move forward here?
Goldstein: Are you talking about the AI in particular?
Loney: No, just in general. If something caught your attention.
Goldstein: Just in general? Well, I think there was really a punchline that came out of each one of these panels. I would say one thing that caught my attention in the AI panel, at the end of the day — you know, one of the big issues with debate on AI is, what is this going to do to the labor market? And is this going to just replace humans? I think there was a bit of a sense of optimism coming out of it, that even though AI is increasingly used, from Anthropic for example, they told us that they are still hiring more engineers, more computer scientists. So there is still room for collaboration between AI and humans, and hopefully we’re going to see that. As I mentioned, I think the Fed panel was also particularly illuminating in trying to think about all the scenarios, and how the Fed can still be resilient despite all the all the pressures. But there was a lot more.
Loney: Joao?
Gomes: I’d say overall, there was quite a bit of optimism and excitement. I think there’s a sense that this is a really interesting time to be in this field. There are issues and challenges. We talked through them. But I think even there, the general sense is we could navigate them. And so I would say, yeah. It was a very positive — this is an exciting time to be in the field, particularly the next two or three years. I think we’ll see a lot of transformations, really revolutionary transformations. I would say that was the undercurrent through the entire set of talks.
