A friend (at Duke, nonetheless no less) and I were talking about the fact that, in the recession, both our institutions have used their considerable endowments pretty conservatively; my undergraduate college, Swarthmore, has been similar. Essentially they treat the interest coming off the endowment as current income, preserving principal.
The issue, though, is that this makes endowment spending cyclical, basically correlated with income from other sources, such as state funding (at a public university), tuition raises, donations, and even grant money. I imagine that a less risk-averse university could actually claim impressive returns to its endowment by spending counter-cyclically. Certainly these benefits could be intellectual or mission-based, as in the ability to hire faculty for relatively little money because of weak job markets. But I imagine the benefits could be financial as well, in the form of increased alumni donations, potential revenues from discoveries, grant income, and so on. What am I missing? Why does it seem like nobody is seeking to spend endowment money aggressively this way?