Iraq war as metaphor for credit bubble...
While watching the excellent Frontline documentary on the Iraq war, it occured to me that there are a lot of parallels to the global credit crisis.
- Initially, the war seemed to be a great success, exceeding all expectations, just like the reflation after the .com bust in 2001/2002.
- The architects of the war had a lot of personal denial, and disbelief when things started to go bad, and were still claiming that things were hunky dory when it was clear to everyone else that they weren't.
- A continual attempt to down-play the gravity of what was happening in the war, and say that things were "contained". Each new strategy (or bail-out) was touted as having "solved" the problem. The failure of one strategy just needs to the implementation of another one, all of which start to look the same after a while.
- The war has unpredictable periods of calm, puntuated by sharp upturns in violence. Just when policy makers think things are going ok a mosque is blown up in Samara, or the UN HQ is vaporized by a car bomb. Think of how the credit crisis will have a Northern Rock episode, and then go through a couple months of calm before the next big shoe drops. In fact, there can even be a month or two where the statistics of sentiment, or various economic indicators, tick up, making everyone think all is well.
- The whole thing drags out far longer, without a firm resolution one way or the other, than either the optimists or pessimists could possibly have foreseen. There is no simple tipping point at which the US loses the war and retreats, but no point at which the US can say they have "won" either.
- Attempts by US policy makers to say this is an "Iraqi" problem, and wash their hands of it, fail as everyone holds them responsible for causing the war in the first place. In fact, Iraqi's themselves don't feel much need to take responsibility for their own affairs since they know they have the US government's hands tied behind it's back (i.e. it doesn't want to accept failure by withdrawing) and can just keep relying on it for largesse.
Link to Frontline documentary on Iraq war:
http://www.pbs.org/wgbh/pages/frontline/bushswar/?campaign=pbshomefeatures_1_frontlinebrbushswar_2008-03-26
- Initially, the war seemed to be a great success, exceeding all expectations, just like the reflation after the .com bust in 2001/2002.
- The architects of the war had a lot of personal denial, and disbelief when things started to go bad, and were still claiming that things were hunky dory when it was clear to everyone else that they weren't.
- A continual attempt to down-play the gravity of what was happening in the war, and say that things were "contained". Each new strategy (or bail-out) was touted as having "solved" the problem. The failure of one strategy just needs to the implementation of another one, all of which start to look the same after a while.
- The war has unpredictable periods of calm, puntuated by sharp upturns in violence. Just when policy makers think things are going ok a mosque is blown up in Samara, or the UN HQ is vaporized by a car bomb. Think of how the credit crisis will have a Northern Rock episode, and then go through a couple months of calm before the next big shoe drops. In fact, there can even be a month or two where the statistics of sentiment, or various economic indicators, tick up, making everyone think all is well.
- The whole thing drags out far longer, without a firm resolution one way or the other, than either the optimists or pessimists could possibly have foreseen. There is no simple tipping point at which the US loses the war and retreats, but no point at which the US can say they have "won" either.
- Attempts by US policy makers to say this is an "Iraqi" problem, and wash their hands of it, fail as everyone holds them responsible for causing the war in the first place. In fact, Iraqi's themselves don't feel much need to take responsibility for their own affairs since they know they have the US government's hands tied behind it's back (i.e. it doesn't want to accept failure by withdrawing) and can just keep relying on it for largesse.
Link to Frontline documentary on Iraq war:
http://www.pbs.org/wgbh/pages/frontline/bushswar/?campaign=pbshomefeatures_1_frontlinebrbushswar_2008-03-26
Comments
Well, maybe some of the pessimists had it right. I remember some "experts" talking about how the Iraqi army would give the US a bigger fight than they expected, the election would never be carried out peacefully, or that the surge wouldn't do anything to decrease violence.
Likewise, there may be some people who correctly foresaw the consequences of the reflation after the .com bubble, but MANY of these oracles didn't realize how far, or long, things would go. I count myself as one of those people. I sold my Bellevue house back in 2003, already worried that things were going to crash. Little did I know that the bubble would expand to such gigantic proportions (and my house more than double in value from when I sold it). Even now, I am surprised sometimes at how these short-term bail-outs get the traction they do. Why anyone can feel the Bear bail-out is bullish is beyond me, yet in the short-term at least we can see that many investors were comforted.
FWIW, it's too early to say the pessimists were right. We're 5 years in Iraq today. I see no signs suggesting we'll really be out within the next 3 years. And there is no reason to believe we won't still have forces in Iraq for another 8-10 years. How about we evaluate how accurate the most accurate Iraq predictions were after all the dust has truly settled.
I guess we could say the same thing about the credit crisis, right? It's too early to say that the bubble-heads are right (i.e. that real-estate prices will crash significantly). Neither have the inflationists or deflationists been proven right, with each side still holding out.
On the other hand, maybe some debates will never be settled. Some people still think the war in Vietnam served a good purpose, and actually did put a check on communist expansion (e.g. making the cost of communist insurgency very high and helping to bankrupt Vietnam's communist backers who had to supply it). And the hawks still maintain that the only reason the US lost in Vietnam was because of the traitors back home who marched on Washington and spat on servicemen, undermining the political will to stick it out.
We could have a situation where a major recession develops, and housing prices crash, yet the bulls still refusing to believe there had ever been a "bubble", and that the collapse only occured because of the negative press and bloggers who caused an irrational stampede for the exits.
The circle containing possible or measured results will be constantly decreasing as results move from being possible to being impossible. For instance, we do not know today that housing in Seattle will fall significantly in price. We do know that predictions of a prolonged period of stable price increases (3%-6% increases between now and 2014) is false. So while we didn't prove the 80% drop in price guy right, we did prove the 8% increase in price guy wrong.
Also, we need to differentiate between general predictions and predictions which are predicated on other events which we know did not happen. If a hawk says we would have won Nam without the dissatisfaction at home, that is an unfalsifiable thesis. It doesn't pass muster, because even with 20/20 hindsight there is no way to validate or falsify such a claim. Likewise, the claim that the Iraq war was necessary to prevent the spread of terrorism can never be validated nor falsified. This is because we only have one chance at each experiment and so can prove with no statistical certainty which is right.
What we can do, is look back at what happened and learn from what was done well or poorly. We can also attempt to quantify the results enough that we can place an event in the proper historical perspective. Regarding Viet Nam, we might now say that there is some evidence that the war did in fact slow the spread of communism, but perhaps the cost in lives and general unrest was too great a price.
Note that I didn't say they were right.
Part of the hindsight of going to Iraq is an unfalsifiable thesis too. We'll never know if Saddam was ready to use chem/bio weapons against Israel, or if going there reduced the threat Al Queda posed to the US. If Al Queda never attacks US interests again, history will write that Iraq was a victory.
Vietnam wasn't a lot different. The overriding military goal of Vietnam was to contain the spread of communism in our SE Asian allies. In that, we succeeded, even if we "lost" South Vietnam. We didn't win in the sense of total capitulation, but if the military objectives are achieved, is it really a loss?
Guess we're 20/20 with a few blind spots.