"YouTube alone now consumes more bandwidth than the entire Internet did in 2000, said Scott Cleland, president of the Precursor Group, a technology research firm." - Portland Oregonian, June 29, 2008.

I see many mentions of the growth in Internet traffic, but this one seems as tangible and relevant as any.

The head slap of the week, possibly even the month, comes from Paul Krugman of the New York Times. Krugman writes on Dec 14 "the problem with the markets isn’t just a lack of liquidity — there’s also a fundamental problem of solvency." I at least will happily confess that I have been led along by all the commentary on the liquidity problems in the market. Liquidity liquidity liquidity, as if some magic force swept through with a financial paper towel and soaked up all the liquidity.

The problem is really, as Krugman points out, that we have now hit a time when no financial institution trusts any other to remain solvent. And thus, nobody will lend anyone money. And thus, no liquidity. So the newspapers are not wrong, but they're describing the symptoms, not the disease.

Just found a wonderful article about Europe's liberalizing markets that goes on to point out that competition policy set in terms of consumer benefit winds up working out better for the economy as a whole. As an example, the authors cite the EC decision to regulate cell phone network connection charges.

One wonders if Cheney's secret Energy Policy Committee took this kind of thinking into account. No wait, one doesn't wonder that.

Odd things don't make the news. Like the opposition party in Japan taking over one house of parliament for the first time ever. And the SEC offering up a 1-year stay-out-of-jail-free card to proud American citizens who didn't get around to getting jobs after they got mortgages:

The SEC has announced that they will allow mortgage lenders to work out resetting mortgages with borrowers in cases where there is an obvious default about to happen. In many cases, that will mean extending the lower coupon rate another year. That may just put off the problem, but it will keep a home off the market and allow for a more orderly solution.

--John Mauldin

So far, I can't find a reference for this, if anyone does, please add a comment. If this is true, I expect the real estate bubble not to pop as badly as I expected over the next year. If people who couldn't afford the true mortgage payment on their houses have another year to sell or get better jobs, I expect many will wake up and do so. Thus, I expect that the stock market won't crash as badly as I thought. Which isn't the same as saying it'll go up...

Barry Ritholtz commented recently on the not-surprising rise in credit card and mortgage defaults as the US economy heads south. Humorously, he figures that people will default on their credit cards to avoid defaulting on their mortgages, while the Financial Times has it the other way around.

Regardless of who's right, it gets me wondering about a 3rd factor. This economic cycle has been odd for its utter lack of wage growth. Generally, macro economics types pin this on the deflationary effects of globalization. I think that's generally true, but I wonder if the easy credit (and the skyrocketing house prices it fueled) is what's kept people from complaining. With the housing bubble popping, I can't help but notice more comments at work about the lack of raises in recent years...

Barry Ritholtz at The Big Picture cites this interesting discussion on the nascent US recession. In a Barron's interview, Gabelli mutual fund manager Larry Haverty says "We are not getting a classic recession, probably due to the fact that inventory management has been so much better than it was 30 years ago, largely due to computers."

As Ritholtz says, this will allow corporate America to manage the slowdown efficiently, but not avoid it. From an investment standpoint, this makes me think that we are less likely to see shocking quarterly results from a manufacturing or import/export-oriented company. Those companies have learned to use computers responsibly, and FASB & SEC rules mostly keep them honest.

But there is a sector that continues to use computers for harm instead of good, and without decent regulatory oversight: investment banks. Between the over-reaching deals private equity has done, the dubiously rated securities based off sub-prime mortgages, and the massive, uncontrolled use of derivatives, it seems inevitable that an investment company will bite the dust during this recession. As Buffett says, it's only when the tide goes out that you can see who has lost his pants.

Bill Gross runs the bond funds for PIMCO. PIMCO has more than $687 billion in assets under management which is more than I have in all my pants pockets combined, so we might as well listen to him. Gross writes quoting Buffett, "society should place an initial emphasis on abundance but then should continuously strive to redistribute the abundance more equitably." Following that reasoning, Gross continues "the wealthy fire back ... that they can more efficiently redistribute wealth than can the society that provided the basis for their riches in the first place." Gross disproves the narrower point by citing the typical parade of self-indulgence on which many rich spend their money. But rather than argue details, it seems safe to look at all countries where taxes do not attempt to redistribute income. Think of any you like, but Saudi Arabia, Brunei and several central African countries past and present come to mind. Not exactly the result to which most citizens aspire.