The Twin Debacles

How the housing collapse is like the Iraq war.

Illustration by Mark Alan Stamaty. Click image to expand.

What do Iraq and the U.S. housing market have in common? At first blush, not much. Iraq, which has taken the lives of thousands and ruined America’s reputation abroad, is far more disastrous than the housing collapse, which has been merely financially devastating.

Nonetheless, the twin debacles, which are defining the foreign policy and domestic economy of the second Bush term, have significant similarities, especially in the way that their public- and private-sector architects and promoters have behaved. Iraq and the housing market offer a case study in how two phenomena can go from being extremely popular to deeply unpopular in a matter of months. And with Iraq having turned into a disaster about two years before housing did, the way Iraq is playing out in the culture may predict what will happen in housing.

Even since the war went bad, the intellectual promoters of America’s Iraq adventure, from Donald Rumsfeld on down, have been asserting that the faltering situation is stabilizing, and will improve soon—perhaps in six months or so. Six months later, progress having failed to materialize, they unironically repeat the same projection. The blogosphere has dubbed these six-month blocks “Friedman units,” after New York Times columnist Thomas Friedman. In housing, I give you “Lereah units,” after former National Association of Realtors chief economist David Lereah, who would pronounce the end of housing’s brief slump—and then make the same incorrect pronouncement a few months later. (See this great illustrated chart at Barry Ritholtz’s blog.) So over the top was Lereah’s enthusiasm in the face of data, he was dubbed the Baghdad Bob of real estate. In both Iraq and housing, official forecasts have become only slightly more realistic after a change at the top. Check out the most recent forecast by Lereah’s replacement and the mixed picture of Iraq depicted by Rumsfeld replacement Robert Gates *.

In both Iraq and housing, folks who got us into the mess have repeatedly reassured the public that the debacle is contained, and that it is not contributing to instability and insecurity in adjacent areas. Both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson have promised that (a) the problems in housing are confined to the subprime market, with little contagion; and (b) the decline in housing activity isn’t affecting the economy at large. In both housing and Iraq, the facts on the ground tell us otherwise. The entire Middle East, from Iran in the east to Gaza in the west, is an insecure tinderbox. And housing subtracteda full percentage point from economic growth in the first quarter, while companies in sectors adjacent to housing—from Home Depot to Bear Stearns—have been bloodied.

In both realms, the discredited architects/forecasters are neither chastened nor appropriately diminished in the public eye. Television shows continue to book as talking heads war-promoters such as Richard Perle, Ken Adelman, and Bill Kristol, whose vision on Iraq was unfailing wrong. The financial media is a bit less forgiving of people whose foolhardy guidance leads investors astray. Even so, the pronouncements of housing bull-market oracles like Toll Brothers CEO Robert Toll, whose company has had to repeatedly cut optimistic projections, and former Federal Reserve Chairman Alan Greenspan, who declared that housing had bottomed last October, are still dutifully recorded and reported.

In the face of mounting public criticism, the architects of the two debacles maintained a united front. But the facades have begun to crack. With Iraq, former officials have settled scores by giving interviews to journalists such as Bob Woodward and, in former CIA director George Tenet’s case, penning a self-justifying memoir that lay the blame squarely at the feet of others. That process is just beginning with housing. Last week, former Federal Reserve Gov. Ed Gramlich told the Wall Street Journal that he pushed former Fed Chairman Alan Greenspan to have the Fed crack down on subprime lenders but that the Maestro refused to lift his baton. Gramlich’s book, to be published later this month, is the first in what is likely to be a series of behind-the-scenes accounts of the subprime mess.

A final similarity: In each case, the wealthy and powerful architects of the disasters have suffered blows to their reputations. But in both Iraq and housing, the physical and financial tolls are falling disproportionately on the disadvantaged portion of the population. It is they who enlist in the army and they who take subprime loans, and they are paying the price in Iraq and at home.

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Correction, June 18, 2007: The article originally misstated the first name of the secretary of Defense. It’s Robert Gates, not William Gates. (Return to the corrected sentence.)