What price freedom? Investing for and against terrorism

How would you rate a venture that over about five years pays back at 100,000:1? At 1,000% per annum, this eclipses long-term equity returns of just over 10%. It even whips the outsized gains of a stock-market sensation like computer-maker Dell, whose shares have appreciated 43% per year since going public in 1988.

Sadly, this particular investment was in physical destruction and human misery. At an upfront cost of an estimated USD 500,000, Al-Qaeda's 11 September attacks caused damage to the order of USD 50 billion. In financial terms, the terrorists hit the jackpot.

When life is cheap and death is dear

Compared to the sums spent to battle them, terrorists' operating costs are pretty low. For instance, according to the US Government's 9/11 Commission, Al-Qaeda's annual budget has ranged from a few million dollars up to about USD 30 million.

Most terrorist outlays, adds the US Council on Foreign Relations, are for 'infrastructure': bribes to corrupt officials, computers and telecoms, forged documents, intelligence gathering and training camps. Then there are variable costs, mainly for arms and explosives, but also "for anything from flight-school tuition to car rentals to airplane tickets." Wages or salaries are not common; indeed, many terrorists have an ordinary day job to pay their living expenses.

Funding comes mainly from crime. Drug smuggling, counterfeiting, kidnapping, fraud, illegal credit card manufacturing and theft are common, says the US Council on Foreign Relations. A high-profile case was the GBP 26.5-million robbery of Belfast's Northern Bank last December. Both the British and Irish governments say the Irish Republican Army was behind the heist.

Over time, the appeal can fade

And there are donors. Irish-Americans have been known to supply money and weapons to Northern Irish terrorists. Al-Qaeda, Palestine's Hamas and Lebanon's Hisbollah draw contributions from sympathizers worldwide, including registered charities. Experts believe these three receive significant income via the 'hawala', a funds-transfer system in parts of the Moslem world that works outside conventional banks and often leaves no paper trail.

The biggest donors - albeit not financially - are the terrorists themselves. They put their personal freedoms, their safety and sometimes their lives on the line.

To some young men (terrorism's major resource) this may seem exciting, but over time its appeal can fade. A former member of the Weathermen (a US group of the 1960s-70s), Bill Ayers voluntarily surrendered to authorities in 1980 after spending 11 years underground, during which he had become a middle-aged, married father. After hiding out for seven years with the Palestine Liberation Army in Lebanon, former Red Army Faction leader Christoph Seidler, then aged 39, gave himself up to German police in 1996.

The key to 'successful' terrorism, it seems, is recruiting people who have little to live for, yet plenty to die for.

Civil society's tradeoff: efficiency versus security

For direct anti-terror measures, there is relatively little public debate about the aims. Much of the world supported the US-led war against Afghanistan's Taliban in 2001, for instance, and most public debate centred on the conflict's means, not its ends.

The greyer area of anti-terrorism is that of indirect measures. Although the following examples are from the US, the same measures apply in many other countries, where there also is a lack of consensus on the proper balance between costs and benefits.

• Increased border controls and transport security - more searches, more seizures, more documentation and more surveillance. As a study from the Organization of Economic Cooperation and Development (OECD) reports, these may have raised the cost of international trade by 1-3%.
• Restricted visas - travel for business, pleasure or education is much harder than it used to be. The number of foreigners entering graduate studies in America has fallen 6-10% annually for the past three years, reports the Council of Graduate Schools, which cites "changing visa policies" as a key reason.
• More financial surveillance - laws such as the Patriot Act of 2001 require more registration and reporting of US securities, even for owners under no suspicion of terrorism. "I have little old lady clients," complains a private banker in Zurich, "who have never set foot in the US and yet must spend hours filling out declarations for the American authorities."
• Looser monetary policy - as the OECD study points out, the US Central Bank, the Federal Reserve, cut its lending rate after 11 September to levels last seen in the early 1960s, bottoming out at 1.2 per cent on 19 September. The European Central Bank, the Bank of England and the Bank of Canada all chipped in with swaps and guarantees to boost liquidity. Some economists warn that this helped reignite inflation, especially in housing markets.
• Insurance guarantees - to indemnify losses caused by terror, the US Government committed USD 250 billion, vastly more than it has pledged to cover natural disasters, says a study from the RAND Institute of Civil Justice. The Terrorism Risk Insurance Act (TRIA) was renewed for one year to the end of 2005, but after that the Republican majority would like it to end. Said House of Representatives' Majority Leader Tom Delay in a recent statement to the Property Casualty Insurers Association: "It is imperative that the industry...work with Congress to develop a long-term solution that does not involve the federal government serving as a reinsurer or permanent backstop. Nor can the government become a funding mechanism for the insurance industry." (see article)

The "ugly" market that died

In all these cases, the debate is about where to draw the line - finding the point at which solidarity ends and needless bureaucracy or financial damage begins. There was, however, one indirect measure that completely failed to make the cut. This was the idea of a futures market for terrorist acts, similar in principle to a betting pool on sporting events. Through an online platform, punters would speculate on a range of political 'fixtures', with maximum stakes of USD 100-200.

US Senators Dorgan and Wyden call fo ‚terror futures‘ to be abolished

No joke, this was proposed by the US Defense Department's Advanced Research Projects Agency. The point of the Policy Analysis Market was to predict upcoming attacks by using market knowledge. As David Pennock, a senior scientist at Yahoo! Research Labs, points out: "[This] was based on decades of research in economics and finance [showing] that markets provide accurate predictions: more accurate than most other forecasting tools we have."

But the "Terror Futures" market never took off. Denounced by media commentators and politicians as foolish, morally ugly and open to manipulation, the idea was shelved the very day after it was announced in mid-2003. So while it may be a sure bet that terrorists will keep trying to hit more jackpots, there will be no online betting as to whether they hit them.