I think part of what's so scary about institutional investors failing to understand the means by which their investments produce returns is that their very job is to act as a proxy for those that don't understand the investments. That is to say, part of their job is to mediate between investors who lack the ability to understand that they're chasing pipe dreams and the investment opportunities they're after in order to ensure that the investment doesn't implode. Sounds like the guy with 40 years on Wall St. gets this. Sounds like many of the banks didn't.
I think part of the reason there's a current boom in demand for startup investments is that returns elsewhere, like interest on simple savings accounts, are essentially zero, at least in the US. Add to this the fact that for software-centric startups so many of the costs have dropped (including developers, if you go with offshore devs.) Plus add to this all the good free info being shared on the web about startups and investment. It all adds up. I think most of those factors won't go away, except the near zero interest rates on savings.
In the wake of the dotcom crash the Fed was forced to lower the cash rate to 1%. Cheap and easy money was a huge contributing factor in creating the subprime disaster.
Now the rate is 0%. This can end no other way than badly.
The words "too big to fail" should send a chill down your spine. Wall street as it stands now has absolutely no aversion to risk because if everything goes pear-shaped the Fed will probably bail them out.
I call this welfare for investment bankers. And it's a terrible, terrible idea.
Anyway, back to VC, we already see the early signs of a bubble: a system awash with cash, high seed valuations, some fairly dubious enterprises being funded, etc.
We all know how this song ends. At some point the house of cards will fall.some companies, VCs and investors will go under. Money will tighten up. Some real businesses will get caught in the crossfire and die. Valuations will go down. Companies won't get funding as a result (we've already seen this with companies seeking funding with 2007/2008 valuations; Mark Suster has written about this).
Oh and the other consequence of that collapse is that it will be a great time to start a business as talent will be much cheaper.
"We all know how this song ends. At some point the house of cards will fall."
You know, both vigilance and long-term thinking are admirable traits. But don't you think it's a bit premature to become gloomy about the next recession? I mean, our economy hasn't really started to recover from the last one.
Besides this, I doubt the financial markets had this level of introspection before the housing collapse. Most banks regarded subprime mortgages as a sure thing and were largely caught unaware (even if they were unaware because they ignored the facts). Don't assume that a collapse is inevitable. A bubble doesn't grow if investors don't let it. So there's a good chance that a collapse will either be averted or won't be that bad.
If history has taught us anything it's that cycles ofboom and bust are inevitable. The lengths of e cycles varies. The degree of the booms and busts varies. Bu the cycle is constant.
It's a fundamental part of human psychology: markets are riven by fear and greed. They overbuy on greed and oversell on fear. There's your cycle.
I'm not predicting the next recession other tbqnthere will be one but guarani more prophetic than saying "it will rain eventually".
The problem is that governments tend to make these things worse and more frequent. Letting banks fail would be q good first step to weeding out the bad participants.
We may not be put of recession but the Internet/VC cycle is closer to the peak (IMHO) than you might otherwise think.
The federal reserve has everybody speculating with %0 interest rates. I suggest they raise interest rates! This will be a good thing as it will encourage capital formation.
The US government has a large debt, as does most of its population. While your solution is entirely correct, I doubt that there is that many who are interested in actually implementing it.
It isn't all bad though: siliconvalley may just ride the secession out, protected by a nice bouble. It sure beats unemployment:)