Futures on Our Future? Never Say Never

Recently, Homeland Security boss Michael Chertoff went public with his "gut feeling" that terrorists would attack the United States again this summer. Now if he could only find a bookie to give him some odds, he'd be in business. With a smart parlay – LA to win, New York to place, and DC to show, perhaps – he could probably double the $170,000 annual salary we pay him to keep our borders secure (and our Wal-Marts full).

While "terror sportsbooks" may be in short supply, there is probably no shortage of financial exchanges that would like to oblige Mr. Chertoff's hunches. Consider: The Chicago Mercantile Exchange already trades futures on hurricane risk, and its New York counterpart is set to offer catastrophic risk contracts on other natural disasters. These instruments enable their users to not only hedge against unforeseen catastrophes, but in some cases actually profit from them.

I bring this up because the underlying risk dynamics of a terror attack are not dissimilar to those of natural disasters. There's data, but also a healthy dose of hunches and gut feelings like Mr. Chertoff's. I think he's on to something. So much so, in fact, that I believe the US government should redirect all of the money it spends on anti-terror intelligence gathering and analysis to create an exchange for trading futures on terrorism risk. We can call it the United States Terror Exchange (jUSTicE).

Admittedly, this idea may seem a tad crass and irresponsible on the surface – perhaps even morbid – but to free-market disciples, it must make a lot of sense. Analysts across the financial spectrum constantly use market prices to assess current conventional wisdom regarding the probability of market movements or the events that drive them. In pure market structures, price analysis can extrapolate not just one person's gut, but the entire market's gut. (James Surowiecki explores this concept in his book "The Wisdom of Crowds.") In fact, a spate of political prediction markets has already sprung up to handicap the 2008 presidential elections.

Imagine harnessing the finely honed instincts of this country's entire financial shark pool (especially those breeds that would be most attracted to such an instrument) against al-Qaeda. Sure, we would be choosing this collective gut feeling over the actual analysis of intelligence by trained experts, but as Chertoff just implied, it's basically six of one, half dozen of the other. Could it possibly be worse than the juvenile and inscrutable color code system we have now?

As more than a mere prediction market, jUSTicE could also solve many of Homeland Security's funding challenges. Not only could the department raise funds by selling seats and collecting fees, but think of the tax revenues the Treasury could collect!

Of course, the likely participants in this market often turn from sharks to shrinking violets when it comes to paying their taxes, and we'd have to give everyone tax breaks on principle (it is their money, despite having made it off of our shared peril) – but it's a start. Besides, how discouraged will al-Qaeda become when they realize that every grainy video and web screed they send to Al-Jazeera will only make Americans (or, at least some of them) richer? They may crawl out of their caves and give up altogether.

So here's how we do it. First, we redirect all existing taxpayer money into developing the exchange and its products. We'd have different contracts for different modes of terror (dirty bomb, chemical, bio, etc.) and terror groups (al-Qaeda, Hamas, etc.). Then, we sell the whole thing to a private equity group for a modest fee, as government would only get in the way of the market working its invisible magic.

Working with Wall Street, our PE group could build a company around the exchange and take it public (all of those draconian Sarbanes-Oxley requirements would be suspended in the name of freedom). Under current laws, the US Treasury would get a full 15 percent of that haul. Take that, Osama!

From there, the trading frenzy could begin. Perhaps Dow Jones could even develop a Global Anti-Freedom Index for our market, and we could get mutual funds and the options market involved as well. Terror ETF's, anyone? Extremists may detonate a dirty bomb in the center of town, but if you survive, that retirement picture will look rosier than ever.

Unfortunately, the value of our patriotic corporation would likely tank with the rest of the stock market in the event of an actual al-Qaeda attack. Even still, in futures markets, there are always winners, so the money will keep rolling in – provided it's not off-shored. But what American company would resort to such practices when the future of the free world is at stake?

As for the exchange, well, not to worry: Surely some hedge fund will swoop in to buy it out, take it private, clean house, and then either flip it or take it public again after the GOP is restored to power in the election directly following the attack.

At this point, some readers may be questioning the patriotism – if not the ethics – of profiteering on the peril of this threat we all face. Well, if we are truly serious about exporting the American Way (i.e. using market principles to structure every facet of our existences) at gunpoint, then don't we owe it to Uncle Sam to stick to our guns and brush aside any meager moral misgivings?

Granted, an idealist may not give the future of jUSTicE very good odds. But if there's one dollar to be made from it, I have to think we're gonna see it sooner or later. Call it a gut feeling. ****

Chime in on the jUSTice blog.

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