From his latest speech:

“There is no nice way to say this, so I will be blunt: Our credit markets had contracted a hideous STD—a securitization transmitted disease—for which lowering the funds rate to negative real levels seemed to me to be not only an ineffective treatment, but a palliative and maybe even a stimulus that would only encourage further mischief.”

See more from his speech at Naked Capitalism.

Both New Gingrich and Paul Krugman are against this ridiculous bailout. That should be enough to demonstrate that it is a bad idea, but I still think it’s going to pass. The congressional leadership of both parties are too deeply entwined with the financial industry to prevent it. The only amusing part of this crisis is reading the naive commentary from the left who apparently believe that the Democrats are less involved than the Republicans in this corruption. At this point, the differences between the Republicans and Democrats are as irrelevant to the main issues of the day as the differences between the Aristocrats and the Populares were during the late years of the Roman Republic. And we all know how that story ended.

UPDATE: Obama saying he may keep Paulson on, has apparently woken up at least one of his supporters to the kind of change he is offering. see here.

I am a huge fan of Nassim Taleb. I think his books The Black Swan: The Impact of the Highly Improbable and Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets are essentially the last word on economics, life, and investing. Despite that, I have recently been pursuing an investing strategy that is fundamentally at odds with what I have learned from him. In his books, he derides common option strategies as “picking up pennies in front of steamrollers.” By this, he means risking a huge loss in return for making small, regular returns. So, how does this apply to me?

While I have been on vacation, I’ve been logging in to my online brokerage, and if the market starts going down, I buy short financials or real-estate ETFs. At the end of the day, I sell them, and I pocket a 1 or 2 percent return for the day (those are the pennies). Now, objectively, this strategy is senseless. If I had simply bought and held the ETFS for two weeks, I would, by my calculations, have made 50% more. Moreover, I ran the real risk of having all of my daily gains, and more, wiped out by an unexpected rise in the stock market (that would be the steamroller). Given that I knew all this, why did I still pursue this strategy?

First, I wasn’t risking much money. More importantly, though, the strategy makes psychological sense, in that it provides the kind of small, regular reward that we all enjoy. Which illustrates a major point of Taleb’s: that humans thrive on small, regular reinforcements of worth, but unfortunately the world is not built that way. Instead, for the most part, we get irregular, large rewards (and blows). Vacations should be a refuge from that irregularity, and a time of small rewards and disappointments. Having said that, I wouldn’t recommend this strategy to anyone. Eventually, you will get burned.

UPDATE: Today, I got run over by the steamroller

From the AP:

The New York Fed has announced modifications to its new Term Securities Lending Facility (TSFL). The TSFL auctions will now allow schedule 2 collateral, instead of the schedule 1 collateral previously proposed. Schedule 2 collateral will now include collaterized mortgage obligations (CMOs) and AAA rated commercial mortgage-backed securities

In other words, they will take any kind of worthless security the banks and security dealers want to pawn off on them.

In a sign that the Web 2.0 bubble may be about to burst, people are actually starting to ask startups how they intend to make money? One of the first victims: Wordpress.com. In this blog post, Matt is called out for opposing advertising, and he is asked how then, Automattic will ever make money? We can expect a lot more of these kind of questions going forward in 2008.

So, the stock market rallied today based on S&P’s affirmation of MBIA’s AAA rating. What was their justification for affirming the rating? That MBIA was able to sell notes at 14% interest to raise $2.6 billion of capital. Name me any other AAA rated institution that is forced to pay 14%. Guess what? You won’t be able to find one. 14% is what junk bonds pay, not AAA rated bonds. Read the details at The Big Picture.

In a post entitled Belt-Tightening in Corporate IT Will be Good For Web 2.0, Eric Schonfeld argues that the projected recession in IT spending will be good for Web 2.0 companies. He claims this, because he thinks companies will increasingly switch from expensive enterprise applications to web-hosted, web 2.0 applications to save money. I think there are two main problems with this argument:

1. Most web 2.0 companies aren’t application companies.
2. Most web 2.0 are highly reliant on advertising revenue.

So, when I see a good argument why the coming recession in advertising won’t hurt web 2.0 companies I’ll listen. Right now, though, I expect a shake-out in 2008. Of course, none of this applies to Google who everyone agrees will grow revenue forever.

UPDATE: For Dan Farber’s much more polished and reasoned take on this issue, see Tech Spending Taking a Dip (Naturally) in 2008.

If you are a developer of web content sites, then you must read Data and the Future of the Web by Scott Karp and Database Gods Bitch About MapReduce by Rich Skrenta. Scott provides the vision of where you need to go, and Rich provides an explanation of the new tools that are going to get you there.

Right now, most publishers provide commodity data (i.e. the same news that you can read on 1,000 other sites) without adding any value to either their users or their advertisers. As Scott notes, Google is the king of extracting commodity data. That has given them the power to also extract most of the revenue. But, there is another kind of data, the personal data that is created by a community of users on sites like Digg and Twitter: “it’s the data that’s still in our heads, the data that we have not put in digital form.” As Scott sees it:

“The future of the web will be determined by companies that can overcome people challenges — to bring EVERYONE’S data online, and make it useful. “

This is the primary challenge content producers face! How to mine the data their users provide them, in order to produce a better content experience that, in turn, provides more value to their users, and advertisers. The ability to do this will be the key to building a great content business in the web 2.0 era. And, it’s why I feel so strongly that content sites must embrace social media.

If Scott shows us the goal, Rich shows us the technical means to get there. Right now, most content producers have a database driven content management system (CMS), combined with a traffic reporting tool like Google Analytics. While this is perfectly good for serving content, and measuring your traffic, this combination will not allow you to do the kind of data analysis that will be needed in the future. The data is going to grow exponentially, and only a system based on technologies like mapreduce, HDFS, and Hypertable will allow your data analysis infrastructure to grow with it (at a cost you can afford).

Gathering increased amounts of data, and building the infrastructure that allows you to analyze and act on that data is the future of large scale content on the web. The only other alternative is content at an individual scale targeted at a niche audience (i.e a blog). At that personal level, the author can truly understand and respond to their audience. At any higher level, you need more, and the most successful publishers will be the ones who have the necessary tools.

I normally avoid political discussions. But, after reading Terry Chay’s post on Ron Paul, I felt compelled to post something. I sympathise with Terry’s frustration with doctrinaire libertarians. Like unreconstructed Marxists, their insistence on finding the solution to all problems in a single principle is a relic of the nineteenth century: a time when the idea of a scientific explanation of society was new enough to excuse this reductionism. Like Marxism, Libertarianism is an excusable enthusiasm in the young, but at some point we all have to grow up. As Terry points out, we have had over one hundred years of development in economics since the nineteenth century, and libertarianism ignores all of them.

In the past, I have compared Ron Paul to Cato the Younger, and I still believe the comparison apt. Like Cato, Paul has never compromised, even when it would have cost him little. It was Cicero’s judgment that Cato’s unwavering commitment to principle did as much, if not more, to destroy the Roman Republic as it contributed to the effort to save it. Similarly, Paul’s intransigence has harmed his cause even as it has led to an unprecedented (for Libertarianism) success. I have no doubt that, should Paul, by some miracle, be elected, he would be an ineffective president. Yet, despite this, as you have probably already noticed, I have a Ron Paul banner in the right-hand column of my blog.

The reason that banner is there is that I believe all politics is contingent: when the house is burning down you don’t advocate pouring on more gasoline. The United States is on a path to bankruptcy, the dollar is debased, and continued foreign interventionism is supported by every major candidate. Paul is the only candidate whose positions would do anything to address these problems. So, in the rather vain hope that he might possibly influence the future path of the country, he has my support.