I wonder if the general problem now is that there's too much capital sloshing around the global financial system for the investment opportunities available. Kinda ironic, since the immediate problem is that banks are undercapitalized, but they wouldn't have made the bad loans if they didn't have spare cash and too few legitimate lending prospects.
Anyone ever play Civilization? There's a problem that occurs once you built a manufacturing plant, research lab, and stock exchange (or whatever the terminal improvements are) in every city: there's nothing left to build! So in Civ1, I'd start building city improvements I didn't really want, just to sell them as soon as they're finished and pad the treasury. The computer gamer's equivalent of Keynesian ditch-digging. In Civ2/3, they added a "Capitalization/Wealth" improvement that does this directly, so I just select that, set science to 100%, and watch the cash pile up. Ironically, this always seems to happen right around 1980 in game time.
In a computer game, extra cash is good, because it's just a way of keeping score. But in the real world, extra cash drives prices up. Cash itself is useless (except in times like the present situation), so companies try to invest it in ever-marginal investments. But companies want a return on their investment, and eventually there's no way you can justify the prices paid for these marginal investments, so prices come crashing down to earth in a financial crisis.
What if the limiting factor isn't the amount of capital itself, but rather the ability of the managers to determine whether a firm is likely to generate a return on that capital? An information problem, not a money problem.
I think this hypothesis might even be testable:
1.) If there is simply too little capital to go around, then interest rates should rise accordingly. Individual firms know the returns they can get on capital; they bid up rates accordingly, and the limited supply of capital goes to the most productive firms.
2.) If there is too much capital and managers cannot discern where to put it, and they realize that fact, then you'd see cash pile up while companies/individuals can't get loans. This describes Berkshire Hathaway over the last 5 years, and a couple of the better VC funds, but not really the economy as a whole.
3.) If there's too much capital sloshing around, managers have imperfect information about where to put it, and they don't realize this, then they will invest in poor prospects, those firms will be unable to pay back the loans, and they'll go bankrupt - soaking up the capital in write-downs. Then there's a temporary shortage of capital while everything gets reallocated and people work off the debts (or write-downs) they just incurred.
#3 sounds a lot like the world we live in. :-)
I have some ideas about how Google could help with this - probably not fix it, as that would require the ability to see into the future, but do a better job than the global financial system is currently doing. Ask me about it at work sometime. :-)
Although this describes something of a subset of the current economic situation, I think it's still safe to say that there is a lot of money available for "the next Google" (or Intel, or...). The problem isn't the money, it's figuring out who the next big players are going to be.
I mean, hell, is this not directly demonstrated by the entire YC process? Here's a model in which there's a very reasonably-sized fund available, and an entire business set up around trying to determine who's got a good potential product, and who hasn't, and then assist the ones that maybe have a chance.
Anyone ever play Civilization? There's a problem that occurs once you built a manufacturing plant, research lab, and stock exchange (or whatever the terminal improvements are) in every city: there's nothing left to build! So in Civ1, I'd start building city improvements I didn't really want, just to sell them as soon as they're finished and pad the treasury. The computer gamer's equivalent of Keynesian ditch-digging. In Civ2/3, they added a "Capitalization/Wealth" improvement that does this directly, so I just select that, set science to 100%, and watch the cash pile up. Ironically, this always seems to happen right around 1980 in game time.
In a computer game, extra cash is good, because it's just a way of keeping score. But in the real world, extra cash drives prices up. Cash itself is useless (except in times like the present situation), so companies try to invest it in ever-marginal investments. But companies want a return on their investment, and eventually there's no way you can justify the prices paid for these marginal investments, so prices come crashing down to earth in a financial crisis.