The NYT article on this ----

Pentagon Prepares a Futures Market on Terror Attacks

ASHINGTON, July 28 — The Pentagon office that proposed spying electronically on 
Americans to monitor potential terrorists has a new experiment. It is an online 
futures trading market, disclosed today by critics, in which anonymous speculators 
would bet on forecasting terrorist attacks, assassinations and coups.

Traders bullish on a biological attack on Israel or bearish on the chances of a North 
Korean missile strike would have the opportunity to bet on the likelihood of such 
events on a new Internet site established by the Defense Advanced Research Projects 

The Pentagon called its latest idea a new way of predicting events and part of its 
search for the "broadest possible set of new ways to prevent terrorist attacks." Two 
Democratic senators who reported the plan called it morally repugnant and grotesque. 
The senators said the program fell under the control of Adm. John M. Poindexter, 
President Ronald Reagan's national security adviser.

One of the two senators, Byron L. Dorgan of North Dakota, said the idea seemed so 
preposterous that he had trouble persuading people it was not a hoax. "Can you 
imagine," Mr. Dorgan asked, "if another country set up a betting parlor so that people 
could go in — and is sponsored by the government itself — people could go in and bet 
on the assassination of an American political figure?" 

After Mr. Dorgan and his fellow critic, Ron Wyden of Oregon, spoke out, the Pentagon 
sought to play down the importance of a program for which the Bush administration has 
sought $8 million through 2005. The White House also altered the Web site so that the 
potential events to be considered by the market that were visible earlier in the day 
at could no longer be seen.

But by that time, Republican officials in the Senate were privately shaking their 
heads over the planned trading. One top aide said he hoped that the Pentagon had a 
good explanation for it.

The Pentagon, in defending the program, said such futures trading had proven effective 
in predicting other events like oil prices, elections and movie ticket sales.

"Research indicates that markets are extremely efficient, effective and timely 
aggregators of dispersed and even hidden information," the Defense Department said in 
a statement. "Futures markets have proven themselves to be good at predicting such 
things as elections results; they are often better than expert opinions."

According to descriptions given to Congress, available at the Web site and provided by 
the two senators, traders who register would deposit money into an account similar to 
a stock account and win or lose money based on predicting events.

"For instance," Mr. Wyden said, "you may think early on that Prime Minister X is going 
to be assassinated. So you buy the futures contracts for 5 cents each. As more people 
begin to think the person's going to be assassinated, the cost of the contract could 
go up, to 50 cents.

"The payoff if he's assassinated is $1 per future. So if it comes to pass, and those 
who bought at 5 cents make 95 cents. Those who bought at 50 cents make 50 cents."

The senators also suggested that terrorists could participate because the traders' 
identities will be unknown.

"This appears to encourage terrorists to participate, either to profit from their 
terrorist activities or to bet against them in order to mislead U.S. intelligence 
authorities," they said in a letter to Admiral Poindexter, the director of the 
Terrorism Information Awareness Office, which the opponents said had developed the 

The initiative, called the Policy Analysis Market, is to begin registering up to 1,000 
traders on Friday. It is the latest problem for the advanced projects agency, or 
Darpa, a Pentagon unit that has run into controversy for the Terrorism Information 
Office. Admiral Poindexter once described a sweeping electronic surveillance plan as a 
way of forestalling terrorism by tapping into computer databases to collect medical, 
travel, credit and financial records. 

Worried about the reach of the program, Congress this year prohibited what was called 
the Total Information Awareness program from being used against Americans. Its name 
was changed to the Terrorism Information Awareness program.

This month, the Senate agreed to block all spending on the program. The House did not. 
Mr. Wyden said he hoped that the new disclosure about the trading program would be the 
death blow for Admiral Poindexter's plan.

The Pentagon did not provide details of the program like how much money participants 
would have to deposit in accounts. Trading is to begin on Oct. 1, with the number of 
participants initially limited to 1,000 and possibly expanding to 10,000 by Jan. 1.

"Involvement in this group prediction process should prove engaging and may prove 
profitable," the Web site said.

The overview of the plan said the market would focus on the economic, civil and 
military futures of Egypt, Jordan, Iran, Iraq, Israel, Saudi Arabia, Syria and Turkey 
and the consequences of United States involvement with those nations. The creators of 
the market envision other trappings of existing markets like derivatives.

In a statement, Darpa said the trading idea was "currently a small research program 
that faces a number of major technical challenges and uncertainties."

"Chief among these," the agency said, "are: Can the market survive and will people 
continue to participate when U.S. authorities use it to prevent terrorist attacks? Can 
futures markets be manipulated by adversaries?"

Mr. Dorgan and Mr. Wyden called for an immediate end to the project and said they 
would use its existence to justify cutting off financial support for the overall 
effort. In the letter to Admiral Poindexter, they called the initiative a "wasteful 
and absurd" use of tax dollars.

"The American people want the federal government to use its resources enhancing our 
security, not gambling on it," the letter said.

Prof. Peter J. Boettke, Deputy Director
James M. Buchanan Center for Political Economy
Department of Economics, MSN 3G4
George Mason University
Fairfax, VA 22030
Phone: 703-993-1149
FAX: 703-993-1133


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