Question: If a veterinarian visiting a Montana ranch should conclude the dead cattle there had died of mad cow disease, who would know first: Congress, or the cattle futures market?
Answer: In hours, word of how the cows died would panic the trading pits. Argentine cattle futures would soar, U.S. cattle futures sink. The impact would be instant on the stock prices of McDonald's, Burger King and Outback.
Investors in futures markets are acutely attuned to anything that affects the price of the commodities they buy and sell by the hour. One credible meteorologist warning of a long, cold winter or summer drought can create havoc in wheat and corn futures.
Over at the Pentagon, until last week, imaginative people were trying to harness that predictive power of futures markets to help us anticipate and prevent acts of terrorism against Americans.
Their arresting idea, however -- of a futures market where the most brilliant anti-terror experts wager on where and how the next strike will come -- thus giving policy-makers instant and constant access to the best consensus judgment -- was mocked to death.
The day the story broke, Oregon Sen. Ron Wyden ranted, "The idea of a federal betting parlor on atrocities and terrorism is ridiculous and it's grotesque." North Dakota Sen. Byron Dorgan ridiculed the betting pool as "incredibly stupid."
Well, as Forrest Gump used to say, Senator, "Stupid is as stupid does."
The principle on which DARPA, the Defense Advanced Research Projects Agency, was improvising and building is an undeniable one: Markets are far superior to bureaucracies in predicting the future.
Markets will ferret out secrets before keepers want them known. When Martha Stewart learned ImClone's stock was falling, she knew something was wrong. She called Sam Wacksal, the president of ImClone. Sam did not return the call. Martha then called her broker, who told her Sam and his family were all selling shares of their own company. Alerted, Martha dumped her shares.
What was the hidden secret? The FDA was about to announce that ImClone's application for approval of a drug the company had invented had been rejected. Though insider trading was being done, the market was correctly signaling imminent bad news for ImClone.
Consider the greatest strategic disasters to befall America last century and how a bettors' market might have predicted them.
Before Pearl Harbor, U.S. Navy officers, aware Japan began its war on Russia in 1904 with a surprise attack on the Russian Pacific squadron at Port Arthur, urged FDR not to transfer the U.S. Pacific fleet from San Diego to Pearl. Administration insiders knew that Japan could not survive the July cutoff of U.S. oil, that FDR had brusquely rejected a summit with Prince Konoye, that an ultimatum had been sent to Tokyo in November telling Japan to get out of China.
Had there been a betting pool among U.S. and British naval officers, and the cryptanalysts who had broken Japan's diplomatic code (and perhaps its naval code), the odds on a war would have been sinking through 1941, as would the odds that the war would start with a Japanese surprise attack on Singapore or Pearl Harbor.
Even two hours warning from a Navy betting pool could have turned Pearl Harbor from a U.S. disaster into a Japanese debacle.
Today, we know there were clues -- the 1993 attack on the World Trade Center, terrorist suspects training at U.S. flying schools, NSA-intercepted "chatter" about an impending "big attack" -- that, properly assessed, might have prevented the horror of 9-11.
Suppose all the anti-terror experts at CIA, Pentagon, NSA and State, active and retired, had been in a betting pool to wager where Al Qaeda would strike next, after the attacks on Khobar Towers, our embassies in Africa and the USS Cole in Aden Harbor. An attack here, using planes as weapons, would have been bet upon and might have been brought to the attention of the FBI and President Bush.
The terrorism betting pool was to be a project of DARPA, the true inventor of the Internet, the market technologies company Net Exchange and the intelligence unit of The Economist. These bright folks were urged to think "outside the box," to explore unorthodox ideas, to create a Distant Early Warning system of terror attacks -- so that future 9-11s could be anticipated and aborted.
They were doing their job. But now, the head of DARPA, Adm. John Poindexter, first in his class at Annapolis, has been forced out by know-nothings, "shocked, shocked," that some one would suggest a betting pool. Anyone recall the last time Congress had a new idea?