Worst of Recession Lies Ahead: But Silicon Valley Innovation Can Spur Recovery

Two valley CEOs, a venture capitalist and a law professor said the economy is going to get worse before it gets better, in a forum hosted by the Churchill Club Feb. 18 at Stanford University in Palo Alto, Calif.

Double-digit unemployment

“We’re in a global recession across all [industry] sectors and it could be pretty massive for many years,” said Patricia Sueltz, chief executive officer of LogLogic, which offers data log, compliance and security management solutions for businesses. Sueltz said it’s possible that the Dow Jones Industrial Average could dip below the 5,000 mark, from its current 7,500, and that the U.S. unemployment rate could reach to 12 percent-to-15 percent, from its current 7.6 percent.

“This is a drastic resetting of everything,” Sueltz said.

Bill Coleman, the CEO of Cassatt Corp., a maker of software to improve the efficiency of data centers, offered a similarly stark assessment of a recession that will be worse than others. Previous recessions, such as the one following the dot-com bust earlier this decade, occurred because supply outpaced demand. In this classic model, the economy retracts until supply and demand come back into balance.

“But this recession is about the cost of capital and that affects everything,” Coleman told the audience of about 100 people. The recession started because banks were too quick to lend money for home mortgages and suffered when many of those homes fell into foreclosure. Banks, also burdened by bad investments and debt, began to fail and turned to the U.S. government for a rescue.

Doubts about stimulus package

The U.S. government stepped in with a $700 billion financial industry bailout package passed by Congress last fall that was intended to get banks to start lending again. And President Barack Obama signed Feb. 17 another $787 billion stimulus bill to jolt the economy back to life. But that approach may not work, said Joseph Grundfest, a professor of law at the Stanford Law School.

“This is a global banking crisis, not just a national or regional one. Why would banks want to lend more money into an economy in a recession?” Grundfest asked. “It’s not in their self-interest.”

Although skeptical that the stimulus bill will fix everything, panelists said it should help restore public confidence and help people hurt by the recession with added unemployment and health benefits and other efforts to create jobs.

Some companies in Silicon Valley are hunkering down to ride out the downturn, said Lisa Lambert, managing director of Intel Capital, the venture capital arm of chipmaker Intel Corp., which invests in promising startups.

“We’re advising our portfolio companies to conserve cash,” said Lambert, who forecast unemployment to hit 10 percent to 11 percent in 2009.

Innovation can help recovery

Still, while the economic outlook remains bleak, technological innovation can offer a way out, Lambert continued. During the Great Depression of the 1930s, 3M invented Scotch tape, General Electric introduced the fluorescent light bulb and Hewlett-Packard, now a $100 billion company, was started.

“Intel is still investing in companies,” she noted, including 169 investments for a total $1.59 billion in 2008. A company that has a unique product, a smart business model and experienced and competent management will find a way to succeed even in this recession, she said.

CEO Coleman agreed there is reason for hope: “I am basically an optimist. Anyone who’s an entrepreneur is an optimist.”