Nearly four years ago, Microsoft (MSFT) invested $240 million in Facebook at a valuation of $15 billion. I’m pretty sure that’s the first time people began publicly worrying about another Internet bubble, and it’s been a slowly crescendoing chorus ever since. Well, until the recent market tumult seemed to render such concerns uncouth at best and asinine at worst.

That means it’s salad days for Internet bubble deniers, the most eloquent and persistent of whom has been TechCrunch’s Sarah Lacy. Her latest salvo came Tuesday, in a post titled: Good News! The Bubble that Never Inflated Has Popped.

I like Sarah, but she’s dead wrong on this. Not only about the bubble’s existence, but also about its consequences.

First, let me be clear that my intent isn’t future vindication. Or relief that I didn’t overlook a major market trend. In other words, I could care less about becoming the Internet bubble’s Peter Schiff. Moreover, it’s not exactly like I’m a lone wolf on this.

Instead, I care because all bubbles ultimately pop (or at least deflate) — and people get hurt in the resulting mess. Those responsible for the original inflation need to quickly recognize what they’ve done, own it and be sure to stop perpetuating it.

Lacy argues that there are two types of bubbles: Economic and psychological. The recent housing bubble was an example of the former, while the tulip bubble of the 1630’s was an example of the latter. The primary difference, she argues, is the type of impact. Economic bubbles, she says, cause actual pocketbook pain. Psychological ones, on the other hand, impact future behavior by eroding at societal trust. The 1990s Internet bubble, therefore, was a little bit of both.

Adopting this dichotomy, I believe that the current Internet bubble is economic. It has been a private market phenomenon much more than a public market one. Specifically, too much money has gone into VC-backed Internet companies at too high a valuation, which will result in some economic hardships. Some data:

• Law firm Fenwick & West reports that valuations for Silicon Valley venture financings rose 61% in Q4 2010. This was the sixth straight quarter in which their barometer showed an average valuation increase, including a 28% bump the prior quarter.
• Thomson Reuters data indicates that pre-money valuations for VC deals in the U.S. tech sector have more than doubled since 2007.
• MoneyTree reports that “Internet-specific” companies raised more first-round VC dollars in Q2 2011 than in any other quarter since Q4 2000.

From a more anecdotal perspective, it’s hard to find an early-stage VC who won’t tell you Internet company valuations have been spiraling out of control. Just the other day, I quoted Alan Patricof as saying: “A lot of earlier-stage deals that would have been priced at $2 million six or twelve months ago have risen to $7 million pre-money.” Another recently showed me a hockey-stick chart that I first thought was a startup’s projected revenue, before he told me it was the average prices his firm had been paying for Internet deals.

Lacy basically shrugs off such concerns, saying that “it’s the job of a VC to make risky bets at valuations which are supposed to reflect future promise and may never materialize.”

True, but that’s always been the case. What we’ve seen over the past couple of years is a change in investment behavior. Did the companies in Patricof’s queue gain 2.5x in “future promise” over the past six months? Or have VCs gotten caught up in a market euphoria that has clouded their judgment? At the very least, the data makes it impossible to plausibly say that it’s just been VC business as usual.

So we move onto Lacy’s more salient point: Even if venture capitalists have lost their heads (which she doesn’t believe they have), it doesn’t constitute a bubble because only “insiders” will be felled. No rash of Average Joe bankruptcies or mass layoffs or food stamp applications.

What this ignores, however, is that venture capitalists don’t actually invest the vast majority of venture capital. When firms like Kleiner Perkins or Sequoia Capital invest, they are mostly doing it on behalf of others. School teachers. Non-profit foundations. University endowments. Public pensioners.

These are the people and groups who get most burned by a VC-fueled investment bubble. Not a few members of the PayPal mafia who can better afford to take the loss. Venture capital may only comprise a small part of such groups’ investment portfolios, but it is the part that is supposed to outperform public equities and bonds. When expected alpha goes rotten, future obligations get put at risk. It’s not as broadly-devastating as the housing crisis, but since when did a bubble have to be of the same mass as a tsunami?

I also am not yet ready to say that the bubble has deflated, although others are beginning to make that case. The public markets have been too volatile to reach long-term conclusions, and the week’s IPO debacle mostly was limited to low-profile issuers (let’s wait until next month, when Groupon and Zynga are expected to price). Plus, just today another daily deals site raised money at a reported $700 million valuation.

So maybe this Internet bubble is already over. Or perhaps it has a bit more runway. Either way, it is real. And it matters.