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Posted by: Michael Mandel on August 24
Today the NYT ran an article entitled “Subprime Fallout Could Help Venture Capitalists”:
Could the subprime problems that have fouled the public market be a mixed blessing for Silicon Valley’s high-technology investors?
Highly out of favor in recent years, public offerings of technology start-ups are enjoying a mild resurgence. And some venture capitalists are arguing that the fragile momentum could be bolstered by the problems that mortgage-related securities have caused in the stock and credit markets.
This echoes my recent post “The Bright Side”
This is a very important point, for both investors and for policymakers. Housing and housing finance are going to be bombed out for the foreseeable future. However, as long as the Fed and the other central banks don’t allow the financial system to crater, the credit and resources that would have gone into housing are going to flow into technology instead.
However, having said that, we still don’t understand the channels by which this may happen. Think about the way that the tech bust of 2001 turned into the housing boom. One avenue, of course, was the very low interest rates by the Fed.
But that wasn’t the only channel. In the aftermath of the 2001 recession, tech companies shifted much of their production to Asia. That stimulated the Asian economies, which led to high savings rates, which in turn helped hold down long rates. That in turn, held down mortgage rates and gave the Asian banks plenty of money to buy mortgaged-back securities. (In the same issue of the NYT was an article on chinese banks holding billions in securities back by subprime loans.)
This channel is not going to run in reverse, though. The factories are in Asia for good. In terms of tech demand, the question is what kind of increase would stimulate U.S-based spending. I’m going to think about that.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.