The current situation in Iraq is a modern tragedy. But in more practical terms it is a very stark illustration of the folly of central planning and the limits of state power in the face of entrenched traditions and proven history. Although the parallels aren't perfect, the rapid dissolution of the puppet Iraqi state can offer some stark lessons to those who are optimistic about our current experiment in central bank dominated economic planning.

The modern state of Iraq was formed primarily by Franco-British decree after the defeat of the Ottoman Empire in the First World War. While the Age of Empire was clearly at an end, Britain and France nostalgically played the game in the Middle East by indiscriminately drawing lines on a map. Often this was done regardless of the cultural and religious differences or the feelings of the local people.

The boundaries of modern Iraq were simply drawn to support the interests of the colonial powers and their preferred local rulers. This was the first mistake of central planning. Following the brutal military regicide of the 23-year old King Faisal II and members of his family on July 14, 1958, a series of men, culminating in Saddam Hussein of the Ba'athist Party, ruled Iraq.

While no one much liked Hussein or his brutal government, the dictator was able to provide stability in a largely ungovernable situation, which in turn provided a bastion against the fundamentalist revival that swept through Iran in the 1970s. But then Saddam himself began believing too strongly in his own invincibility, and foolishly invaded neighboring Kuwait in the fall of 1990.

The Western response was decisive. President George H. W. Bush and Prime Minister Thatcher encouraged an impressive grouping of allies, including many Arab nations into providing a massive military force. The effective diplomacy was complemented by a sensible tactical plan that accomplished the coalition's aims without leaving chaos within Iraq itself. Most impressively, President Bush saw the wisdom, unpopular in many circles, of preserving Saddam Hussein in power as a stabilizing and anti-Iranian force.

In the ensuing years, rather than admit the obvious, that a tyrant like Saddam was the only means capable of holding together a fractious, poorly-designed country, many in our enlightened capitals began to believe that they had the ability to craft a better country through force of arms and power of persuasion. This is the second failure of central planning.

George W. Bush, perhaps inspired to rescue the family name, or to do something bold to remake the Middle East in the wake of the September 11 attacks, led an invasion of Iraq with the aim of regime change and nation building. Neither the younger Bush nor his close advisers had much idea of military combat or the realities of the modern Middle East. Like many government experts, they believed that sheer force could overcome these shortfalls. This fatal cocktail of ignorance, arrogance and incompetence resulted in a massive loss of blood and treasure. The cumulative results of these bad decisions may deliver an outcome that is the exact opposite of what the U.S. hoped to achieve.

Al Qaeda and its cohorts have three basic Middle Eastern aims: First the removal of Western influence, second, the overthrow of local monarchies and hereditary rulers, and third, to re-establish an expansionist caliphate, without defined boundaries. Those aims are much more clearly established now than before the U.S.-led invasion of 2003.

In 2006-08, the Western Allies had three main options for shaping the future of Iraq that avoided disintegration. First was to accept semi-autonomous Kurdish, Sunni and Shiite regions. Second was to adopt a federated system. Third was to establish a strong centralized democratic government seen by the main groupings to be both balanced and fair. The U.S. selected the third option.

Elected by the Shiite majority, President Maliki has clearly ruled in a manner that is biased in their favor. Effectively, he has also been a puppet of Shiite Iran. This inflamed the Kurds and the Sunni minority, setting the stage for the success of the ISIS/ISIL terrorist organization which threatens now the Maliki government and the integrity of Iraq. (Their success is also a function of the protracted civil war in Syria). To the acute embarrassment of the United States, her current enemy, President Assad, stands as a bulwark against the spread of ISIS/ISIL!

By disposing of Saddam Hussein, America unleashed a chaotic situation in the Middle East that threatens to fester. What should America do?

One golden rule of war and investment is not to double down on disaster as Hitler did at Stalingrad. However, rather than accept the disaster of Iraq, many well-meaning hawks are pressing President Obama to re-commit ground troops in clear opposition to the will of grass roots Americans. As such, they risk Republicans losing what once appeared to be a possible election landslide victory against an unpopular President.

By committing some 300 special forces 'advisors' to Iraq, President Obama risks further loss of American blood, greater damage to national prestige and even an escalation of U.S. force levels. A cynic might argue that by appearing to be forced into an Iraqi re-engagement, President Obama may be able to replace his war-like stance over Syria and divert attention away from his escalating domestic failures.

Regardless, an American return to Iraq will compound a disaster. Worse, it could lead to an extension of the conflict and have a disturbing effect on financial markets. It would be just one more example of the arrogance of top government officials who have little or no idea of history or of the real situation on the ground. Without a clear chance of winning, it may be best for America to do nothing.

After all, a desire 'to do something' can often backfire. This is certainly the case with respect to the Federal Reserve's response to the financial collapse of 2008. Although that crisis was in itself the result of previous policy errors, the Fed's willingness to unleash shock and awe in the form of massive monetary stimulus, has led us into a cul-de-sac with few good options.

Central planning and control is the essence of socialism. Throughout modern history, it has resulted in economic decline with abject poverty shared by all save the governing elite. What is needed now is for governments to do less, not more.

John Browne is a Senior Economic Consultant to Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

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