The war on terrorism has come to this: The Pentagon is setting up a commodity-style market to use real investors -- putting down real money -- to help its generals predict terrorist attacks, coups d'etat and other turmoil in the Middle East.
Under the program, revealed Monday by two of its critics in the Senate, investors with knowledge of the Middle East would be lured -- by the prospect of making money of course -- into using their expertise to buy and sell futures contracts on world events.
And the Pentagon would be able to study the collective wisdom of the free market on such weighty questions as the impact of U.S. involvement in Iraq and the stability of the monarchy in Jordan.
Two angry senators disclosed the program, called the Policy Analysis Market, in hopes of heading off the registration of investors, set to begin Friday. Democratic Sens. Ron Wyden of Oregon and Byron L. Dorgan of North Dakota said more than $500,000 in taxpayer funds has already been spent to develop the project, and the Pentagon has requested $8 million over the next two years. Trading would begin Oct. 1.
"Spending taxpayer dollars to create terrorism betting parlors is as wasteful as it is repugnant," Wyden and Dorgan said Monday in a letter to the Pentagon. "The American people want the federal government to use its resources enhancing our security, not gambling on it."
The Policy Analysis Market initiative is described by the Defense Department's Defense Advanced Research Projects Agency, known as DARPA, as "initially a small research program" to use economic market forces to help predict future events in the Middle East.
It would be overseen by DARPA's Information Awareness Office, whose director is retired Adm. John M. Poindexter, the former Iran-Contra figure, according to DARPA's Web site.
The technology was developed by San Diego-based Net Exchange, in conjunction with DARPA and the Economist Intelligence Unit, the research arm of the publishers of the Economist magazine, DARPA said.
Using a market-style trading system, up to 10,000 investors would buy futures contracts if they believe an event will occur, and try to sell a contract if they believe it won't. They would be motivated by the "prospect of profit and at pain of loss" to make accurate predictions.
The entire system could help predict terrorist attacks, according to a report to Congress on the project, because "the rapid reaction of markets to knowledge held by only a few participants may provide an early warning system to avoid surprise."
DARPA's Web site says government agencies will not be allowed to participate and will not have access to the identities or funds of traders, which Wyden said could allow terrorists to use it.
Indeed, anybody with money to start a trading account could sign up. The theory is that those who buy such futures contracts would be experts in their fields. The market would be a tool for combining, or "aggregating," the informed opinions of many people into a single assessment.
For starters, the market would focus on the economic, civil and military futures of Egypt, Jordan, Iran, Iraq, Israel, Saudi Arabia, Syria and Turkey, and the effect of U.S. involvement with each.
Futures contracts, most commonly purchased on the prices of oil, pork bellies and other commodities, often spring up wherever people think money can be made by predicting the future. They can be purchased on upcoming elections, weather patterns and interest-rate decisions by the Federal Reserve.
But under the Pentagon proposal, they would be asked to gamble on questions such as, "Will terrorists attack Israel with bioweapons in the next year?" according to official DARPA Web sites and other government documents.
Other potential subjects include whether Palestinian leader Yasser Arafat would be assassinated and whether the king of Jordan would be deposed.
The DARPA project appears to be the first time anyone has proposed betting on when and where a terrorist attack might occur. The Defense Department has requested $3 million for the program for fiscal year 2004, and $5 million for the following year.
At a Capitol Hill news conference, Wyden and Dorgan railed against the initiative, calling it an ill-conceived waste of taxpayer money. They said it could even be manipulated by terrorists so that they could make profits by "betting" on attacks that they had not yet launched.
"Can you imagine if another country set up a betting parlor so that people could ... bet on the assassination of an American political figure?" Dorgan asked. It is, he said, "unbelievably stupid."
Poindexter and other senior DARPA officials could not be reached for comment. But in a statement, DARPA said it "is exploring new ways to help analysts predict and thereby prevent terrorist attacks through the use of futures market mechanisms. Research indicates that markets are extremely efficient, effective and timely aggregators of dispersed and even hidden information."
"Futures markets have proven themselves to be good at predicting such things as elections results; they are often better than expert opinions," it added. "DARPA has undertaken this research as part of its effort to investigate the broadest possible set of new ways to prevent terrorist attacks and will continue to reevaluate the technical promise of the program before committing additional funds beyond Fiscal Year 2003."
In its statement, DARPA called the project "currently a small research program that faces a number of major technical challenges and uncertainties. Chief among these 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?"
In the 1980s, Poindexter was President Reagan's national security advisor when the administration sold arms to Iran in exchange for the release of American hostages in Lebanon, then illegally diverted the proceeds to the Contra anticommunist guerrillas in Nicaragua. He was convicted of lying to Congress, but his conviction was later overturned.