I’ve always believed starting a company in a down economy is a good idea. Costs come right down office, legal, resources etc. You are well positioned to take advantage when the economy, and it will, turns around.
Also entrepreneurs think creatively to achive their ends which is not always the case when things are flowing easily.
A related article from Paul Graham, who runs an incubator called Y combinator.
While this is a very popular idea, severe shortage of initial funding, cripples an ability of new start ups to develop new products. The development is still going on, but the speed of it slowed to a crawl because the founders can only afford to do it part-time, while holding on to their jobs.
Personally, I think flood of VC funding, as we have experienced before the Tech Wreck, is quite destructive to innovation with all sorts of well funded me-too projects sucking talent out of reach off truly different projects. So it would be nice to have a little more equilibrium in ebbs and floods of seed capital availability.