They could sell some of their holdings in these huge companies they have 7% of but basically they are saying everything is screwed right now and they expect a decade or more of depression.
I don't read it that way. There is reduced funding available now . So the current batch is smaller. They are still thinking of more than 10 year horizon to mature opportunities but the funds available for that runway is smaller. Hence the small batch. That is my read any way. The depression may be over in 2 years (say), but that does nothing for investor sentiment and available cash right now.
This argument holds true for most VC firms in general. My contention is that YC's stance on defining the "bar for acceptance" seems to be on how much cash they have. So a mediocre company and founders could have got in the previous batch and a deserving one may not this year. I agree that this is fair and square in market economics. I simply expected more from this institution.
I am not sure how you came to that conclusion. This reduction can still be consistent with a fixed bar for acceptance. Say that earlier everyone who cleared the bar got funded. Now, only 60% of those who clear the bar gets funded. The further selection can be on the basis of a performance criteria like value expectation or risk of failure, or it could be on the basis of investor preference to certain areas.