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If there was too much capital sloshing around, it would be easy for companies and individuals to get loans. But it's not.

by lacker 18y ago

nostrademons 18y ago
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. :-)
- thaumaturgy 18y ago
  Bingo! 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.

If there was too much capital sloshing around, it would be easy for companies and individuals to get loans. But it's not.

by lacker 18y ago

If there was too much capital sloshing around, it would be easy for companies and individuals to get loans. But it's not.

nostrademons 18y ago

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. :-)

thaumaturgy 18y ago
Bingo! 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.