October 26th, 2008
05:02 PM ET

GPS October 26, 2008: Is American capitalism dead?

FAREED ZAKARIA, HOST, GLOBAL PUBLIC SQUARE: Welcome to the GLOBAL PUBLIC SQUARE, to our viewers in the United States and around the world. I'm Fareed Zakaria.

Over the last few weeks, many observers have said the American model of capitalism is dead. After all, the great names of American finance are in tatters, or are now wholly-owned subsidiaries of foreign corporations.

So, many around the world say this is an American problem. Actually, look around. Countries all over the world are reeling.

France's model of capitalism, for example, is quite different from the United States - much more state intervention, much more ownership. Yet its property market also collapsed, and its banks proved to be over-exposed and over-leveraged. So also Spain, Britain, Germany.

As growth slows in Europe and America, other countries get less investment from rich countries and can export fewer goods to them. So, those who wanted to gloat over America's troubles are now realizing that it comes at a price for their countries.

Nowhere is this more true than in the oil-exporting juggernauts. Countries like Russia, Venezuela and Iran have all perfected the art of criticizing the West while enriching themselves by selling to the West.

But now, as the Western model is battered, their own oil revenues also plunge. It turns out that, if America is not doing well, it's tough for Russia and Iran and Venezuela to do well either. We really are in this together.

Now, in just a moment, I'll be talking to Robert Rubin, former Treasury secretary, and some fascinating European political pundits - Bernard-Henri Levy and Jo Joffe.

Let's get started.

Bill Clinton once called Robert Rubin the best Treasury secretary the United States had had since Alexander Hamilton. Rubin served in that Cabinet position from 1995 to 1999. Those were prosperous years for the United States. It seems like a long time ago.

Bob Rubin also had a storied banking career. He was the head of the investment bank - or that's what we called in then - Goldman Sachs. And more recently, he is now the senior counselor at Citigroup. He's been also acting as an unofficial adviser to Barack Obama's presidential campaign.

Bob Rubin, welcome.


ZAKARIA: When do you think we'll get to a point where there really - we're back to normal in terms of credit markets? Forget about the price of equities and things like that, but just there's a restoration of a sense that economic activity is back on track.

RUBIN: I think, given the circumstance we're now in, Fareed, which is a real crisis of confidence, this is a perfect storm. This is a very low probability event that is having huge consequence.

I think we need to continue to have highly proactive public policy. And I think a lot has been done that's been very constructive.

I'd say going forward that the most important thing we can do is a very large fiscal stimulus, married with a commitment to reestablish some sound fiscal conditions over time, once the economy is healthy again.

I think we have got to find a better answer to this question of mortgage foreclosure. And there's been a lot of focus on it. There have been a lot of proposals. There's no proposal yet - it's very complex for a whole host of reasons. And that's why ...

ZAKARIA: And the basic issue that you're trying to solve is, the underlying asset here, which is housing prices, continues to decline. And so, you want to in some way shore that up, because this mountain of debt and these financial instruments are sinking, in large part, because that underlying asset is sinking.

RUBIN: It is the - you're absolutely right - the central problem, although there are plenty of other problems - are the declining housing prices, plus a terrible problem for families all across the country.

And if you could effectively catalyze the renegotiation of mortgages - and for all kinds of reasons, there's a real economic reason why lenders and borrowers should want to do that - you could help with the housing price problem, you could help with families, and you could really go, I think, take an important step towards stabilizing.

The problem is that there have been a - a large number of very smart people have focused on this. And so far, at least, no proposal has come forward, around which there is a consensus that - or some reasonable consensus - this will work.

But I will tell you this from having our meetings with Senator Obama, he is intensely focused on this, and he has a little task force working on this right now, so that - to try to take all the proposals that are around, and find something that people think has a high probability of working.

ZAKARIA: Do you think Hank Paulson has done a good job or a bad job, this Treasury secretary?

RUBIN: I think Hank has done a good job. And I think he has faced unprecedented circumstances. And he's dealt with it with tremendous force.

You're never going to agree with everybody - anybody about everything. I didn't even agree with myself about everything.

But I think that he has taken a number of really courageous steps in the face of unprecedented conditions.

It's very easy - I noticed this when I was there dealing with the Mexican crisis and the Asian crisis - it's very easy for critics to predict the past. It's a lot harder to predict the future, and to sit in that seat - and I sat there - and to face the enormous uncertainties that surround each of these, these kinds of events.

ZAKARIA: Do you think it was a mistake to let Lehman go under?

RUBIN: Well, that will be debated for a long time, Fareed. And, you know, different people have different views. Rather than express my own view, I would just say that it was obviously a complex situation.

I think it did, even looking at it at that time, it seemed like it had a lot of consequences. But there were also a lot of people - thoughtful people - who thought it was a good idea. And I think that's just going to be one of those issues that'll get debated.

ZAKARIA: A lot of people feel that another man is to blame for all this, and that's Alan Greenspan, a man you worked with very closely during the '90s.

And the argument against Greenspan is that he kept rates too low for too long and cut rates too often in crises, that he glorified this new world of derivatives and said that they were basically very stable, and that the greater complexity of finance actually made things more stable, and that he didn't use the Fed's authority to properly regulate various institutions - Fannie Mae and Freddie Mac, for example - that he could have.

Do you think there's anything to all this?

RUBIN: Well, let me give you a general answer, and let me give you a specific answer.

I think, in general, when people look back on the many years that Alan Greenspan was chairman of the Federal Reserve Board, I think they will decide that he was an exceedingly effective chairman. And when you look at all the different problems and situations that he faced as he went through his tenure - and we worked very closely with him in the years that we were there - I think that he had a deeply insightful sense of what was happening in markets.

He was the first public official I know of at least, who called the change in - who called the increase in productivity that we began to see in sort of '95, I guess '96 or thereabouts. As a consequence, he didn't put as much constraint on as the Fed might otherwise have done.

And you look back over his whole career, I think been an extraordinarily effective chairman. And I think that's what the world will look at.

ZAKARIA: People think that you should have regulated things more. There is a charge out there that says, Rubin was from Wall Street, you know, he didn't think Wall Street needed to be regulated.

RUBIN: That's not true.

And if you look at my book, which came out in 2003, what I say in the book is that, I had felt for a long time - and I had - that derivatives were very - were a constructive part of our system under normal circumstances, but under unusual circumstance could create very serious, additional systemic risk. And as a consequence, that capital requirements and margin requirements on derivatives should have been increased by very large amounts - I actually think multiples.

And I said that in my book in 2003. And I thought it even when I was senior partner at Goldman Sachs.

ZAKARIA: When you were Treasury secretary, why didn't you do it?

RUBIN: Because there was no political reality whatsoever, Fareed. At those times - in those days, there was nobody - well, I shouldn't say there was nobody; I'm sure there was somebody - but there was no political constituency for doing that.

And also, you have a limited amount of political capital when you're in one of those jobs. And we had the Mexican financial crisis to deal with. We had the debt ceiling crisis to deal with. We had the Asian - well, we call it the Asian crisis. It was actually Russia, to some extent Brazil.

So, there was a lot to do, and there was no political reality in doing this.

But I said in my book, I thought then, I think now and I thought when I was senior partner at Goldman Sachs - that margin capital requirements do need to be increased by a multiple. And I actually think it is the only effective - I may be wrong about this - but I think it is really the only effective way to create additional cushion, to reduce the risk leverage that's involved in these and to reduce their usage.

ZAKARIA: Do you think, going forward, we're going to have a very different kind of capitalism in this country, because of this enormous government intervention in the economy? RUBIN: I think it's a very complex question as to how this will affect what our system is going to be like. Let's just, for the moment, look more narrowly at the financial system.

Clearly, there needs to be a lot of re-conceptualizing, if you will, between the objectives of having a market-based financial system - which I still think best serves capital allocation and saving allocation needs - and adequate protection against systemic risk and consumer risk, and also the reality, which is that some number of institutions are simply too interconnected to be allowed to fail.

And we need to find an optimal balance here between all these considerations, so we continue to get the benefits - well, I'm sorry, it's the other around - so that we get - we need to find an optimal balance, so that we get the systemic and consumer protection that we need, but we also continue to get the benefits of having a market- based system.

And that is not a question of minimizing or eliminating risk, it's a question - of systemic risk and consumer protection ...


RUBIN: ... it's a question of optimizing.

ZAKARIA: Who wins in this scenario going forward? You have a situation where Western governments are going to take on enormous debts. The Chinese government has about $2 trillion of foreign exchange reserves. Japan has large savings. Saudi Arabia has large savings.

Are we looking at some kind of a power shift that will allow countries like China to become, to play a larger role in the world?

RUBIN: Well, China is going to play a major role in the world economically, because of the size of its economy, its rate of growth and its now enormous capital, or supply of foreign reserves. But principally, not because of that reason, but rather because of the size of the country and the population, the rate of growth. And it'll be the largest economy in the world some decades down the road, most likely. They have very large challenges to meet, too.

I think, in that context, I think the United States can be a very successful economy. We have some very large comparative advantages - our dynamism, our flexible labor and capital markets, our cultural embrace of change, our relative openness, our ability to attract very good people from around the world - although I do think we have to make sure that we don't create so many barriers to coming here that we begin to lose that.

But to realize that potential, we have to meet our own hugely consequential challenges. And that's where I think we've fallen far short, particularly in this current decade.

We have to reestablish sound fiscal conditions. We have to have an effective health care regime and energy regime, infrastructure, basic research, public education and help for the poor to move into the economic mainstream, which is an economic issue, help for those dislocated by change - and a lot else.

So, there's a lot to do. It can be done. But to do it, we've got to have a political system that is really engaged and then willing to make tough political decisions.

ZAKARIA: We'll be right back.


ZAKARIA: And we're back with former Treasury Secretary Bob Rubin.

Let's start with that last bit. People talk about a crisis and how it's going to test the next president.

Well, you've been watching, in a sense, a crisis that is testing Barack Obama already, the financial crisis. You've been in on a number of meetings where he has formulated and decided what his position is going to be, what he would do if he were president - all that kind of thing.

Describe what Obama is like in those meetings.

RUBIN: I think he's remarkable, Fareed. I first met him about four years ago through a fellow who had worked with me at Treasury - my chief of staff at Treasury - who had been on the Harvard Law Review with him.

And then after Hillary dropped out, I got very involved with Barack. And they're a small group of us - Larry Summers, Laura Tyson, Paul Volcker, in some measure Warren Buffett, and a few others a little bit more intermittently - who have been very involved with him. And I would say that we probably talk with him once a week perhaps, either on the phone most of the time, or occasionally in person.

And each time he does the same thing. He says, "I want to put all politics aside. I want to put the campaign aside, and I want to really focus on what's happening."

And it is a remarkable thing for somebody to do in the middle of a campaign. He has tremendous seriousness of purpose. He is very bright, as we all know.

He thinks, he makes decisions very much like President Clinton did. He wants to get all the factors on the table, and then he weighs and balances them, and tries to judge what the probabilities and the tradeoffs are.

And he's very much the leader of these discussions. He is the leader of his own economic team. I think he's really and truly terrific, Fareed.

ZAKARIA: How would he - but he seems very different temperamentally from Clinton.

RUBIN: He's different temperamentally, but he's very similar in the way that he approaches decisions. He recognizes the inherent complexity of issues, and he's very much focused on trying to get in front of him all the considerations, including the views of those who disagree with him. And then he's very much a weigher and a balancer.

You know, temperamentally, it's interesting. They are somewhat different, but they both have a sense of humor. Obama has a very good, sort of ironic sense of humor. And they're both very similar to work for, in the sense that they're engaged, they're interacting.

And I don't think that Senator Obama cares whether you're a 35- year-old who's sitting at the table, or you're double that age and much more experienced. What he cares about is the substance that you bring to the discussion. And that's exactly the way President Clinton was.

ZAKARIA: OK. So, let's assume Obama gets elected, and he calls you a couple of days later and says, "Bob, the country is facing an enormous economic crisis. I'd like you to come back as secretary of the Treasury."

RUBIN: Well, first place, when you say assuming he gets elected, I'd say, if he gets elected, I think he - I really think he has all the attributes to be a terrific president, but I still think this is going to be a very tough election.

Senator Obama knows that it is not my view of my own life to go in that direction. I also think there are some really, really outstanding people that he could appoint to that job. And I think he will be very, very well served, whatever choice he makes amongst those people.

But I'm not going back to Washington.

ZAKARIA: In some ways, it's a massive version of the problem you guys faced in 1992. There were a number of people saying the budget is not as important; we need to have very large spending programs of various kinds.

You were among the people telling President Clinton, no, the budget is very important, because you're sending a signal to the markets that America is in fiscal - in good shape fiscally and on the right track fiscally.

So, now you have this problem on steroids, because the needs are even more great. We've let our infrastructure wear down. We need to make energy investments.

On the other hand, the budget deficit makes the Clinton - the budget deficit you inherited look like nothing.

So, what would you do? Would you worry more about deficit reduction? Or would you worry more about stimulus?

RUBIN: I would do both. And let me tell you what I would do.

The other difference, Fareed, was that, in 1992, and then '93, when President Clinton became president, we had high interest rates. And our view at the time was bring deficits down. Interest rates hopefully will come down, and you'll have stimulation of the economy, and so forth. And it worked. And it was, I think, a very good decision on President Clinton's part.

Senator Obama, if he gets elected - or whoever gets elected - is going to face a different situation, because interest rates are already low.

I think we should do the following. I think we need a very large fiscal stimulus now. I think there'll be a debate about how large that should be, but I think it should be very large. And it should be constructed so that it gives you a lot of economic demand relative to the dollars that you spend, and takes effect right now.

Secondly ...

ZAKARIA: Which means tax cuts, or infrastructure?

RUBIN: Well, my own personal predilection would be to think that it should be more infrastructure, if we can find infrastructure projects that are immediately effective. That may be ones that are being slowed down because of lack of resources, or whatever.

There's been a lot of bad experience in saying that infrastructure is going to be done immediately, and then it doesn't get done immediately.

ZAKARIA: Yes, right.

RUBIN: But I think there's enough that could be done. So, yes, infrastructure.

But I also think unemployment insurance, food stamps. There's a firm called LIHEAP, which is for poor people who need assistance in that respect.

A lot of states and cities are facing deficits that are going to force them to cut back. You could provide assistance to states and cities, and that would create a lot of activity.

And perhaps rebates. I actually think tax rebates are probably - even if they're properly focused on the lower and middle income people, as they should be - even then, are probably less effective than the spending. But my guess is ...

ZAKARIA: Because people are seeming to save that money, rather than spend it.

RUBIN: Because they'll save some portion of it. And in the long run, we need to have a higher savings rate, a personal savings rate. But in the short run, that is counterproductive. Secondly, I think that he's got to marry that - marry a large fiscal stimulus - with a real commitment to reestablishing sound fiscal conditions in this country over time, because failure to do that can create the kinds of problems that you were just alluding to, which is that you create great concerns in the international markets. That undermines our bond market, undermines our currency. And that would be hugely counterproductive.

So, I think you have to marry those two - strong stimulus now, married with, connected with, a commitment to reestablishing sound fiscal conditions over time. And in that context, you have to leave budgetary room for critical public investment in the many areas that you mentioned - infrastructure, education, health care and the rest.

It's not simple. I think it's doable. It will involve sequencing. But it's going to take enormous seriousness of purpose.

And I don't think there's any question, Senator Obama has exactly that seriousness of purpose and thoughtfulness - and, I might add, pragmatic problem-solving approach - which it's going to take.

ZAKARIA: On that note, Robert Rubin, thank you so much.

RUBIN: Thank you, Fareed. It was very good to be with you.

ZAKARIA: A pleasure.


ZAKARIA: All right. You have no doubt been bombarded with endless hours of political punditry on the presidential election - panels of experts droning on about Sarah Palin's wardrobe, early voting problems and, of course, the latest poll of polls.

I want you to forget all that, and we're going to try a different kind of political punditry. I like to talk about elections as much as the next guy, but I'm going to try and talk to people outside the United States to get some perspective.

And with that in mind, we have two familiar, distinguished panelists - Bernard-Henri Levy, the well-known French intellectual and the author of a fascinating new book called "Left in Dark Times," and Josef Joffe, the talented journalist and editor of the prestigious German weekly newspaper, "Die Zeit." Welcome.

Bernard, you've compared Obama to John F. Kennedy on this program. And one of the things Kennedy faced was a series of foreign policy tests, from the Bay of Pigs, to the summit with Khrushchev. And in the early ones, he didn't do so well. The Bay of Pigs, he basically got wrong. With the summit with Khrushchev, the Russians left with the impression that he was weak and irresolute.

Do you think there is that danger? You like Obama.

BERNARD-HENRI LEVY, AUTHOR, "LEFT IN DARK TIMES": Yes. It's not just a question of like. I believe that he has the shoulders of a president. And I believe it since a long time.

I compared him to Kennedy on this show, and I compared him with Bill Clinton. Four years ago I wrote a piece, which was entitled "Obama: A Black Clinton." Four years ago, few people spoke of him as a possible president. I wrote that in the Atlantic Monthly and in a French newspaper. So, this is one thing.

The other thing is that all the peoples in the world are not as democratic as America is. You will have some leaders who will be very comfortable - and some uncomfortable - with the fact of discussing with a half-black president.

I tell you ...

ZAKARIA: Really? Do you think that there is - there will be effectively ...

LEVY: You have some countries.

ZAKARIA: ... a racist response?

LEVY: If we can put the feet in the dish, as we say in France. I know, I read the press abroad, you have some countries who will feel uncomfortable, of course, with this. Everybody speaks about the racism of America, you know, the last minute racism. Will they dare to put the vote for Obama?

You have that much more on the stage of the world in some countries.

JOSEF JOFFE, EDITOR, "DIE ZEIT": The skin color I don't think will matter, because by now, even Europeans and others around the world's table have seen that there are black people in the world.

ZAKARIA: All right. We have to talk about the fact that John McCain could well win the election.

JOFFE: Right, yes.

ZAKARIA: So, what will a McCain presidency look like to the rest of the world?

JOFFE: I think the world - and I think here we are totally in agreement - the world has, believes that its problem with America was Bush. And I don't believe that. I think the problem with Bush is worth about 20 or 30 percent.

The problem the world has with America is power, an untrammeled power, especially after the Soviet Union collapsed. And that power is still there.

And that's where I think the disappointment is going to come from in Obama's case. He's not a savior, as Europeans think.

ZAKARIA: What will you do if John McCain is elected president? You know, there are Americans who say they'll move to France. But you're already in France.

LEVY: Yes, but I'm more and more in America. So I will be probably less and less in America if McCain was elected, because, first of all, he has disappointment. There is such a hope in the camp of Obama, that it would be - when you take the risk to pick the bubble of the hope, it is really problematic.

There is a huge bubble of hope. Election of McCain will mean the destroying of that, number one.

Number two, there would be a great deal of anxiety in the world, because, if there is one candidate about whom nobody knows what is really his position is McCain, really. Is he a Bushist, not Bushist, conservative? Of which way, of which tendency?

There is a real irresolution and a real enigma. He is not a bad guy, by the way. He is brave, a veteran, and so on. But his position is so confused.

And now you have Sarah Palin, who is, frankly - I don't want to, as we say in French, fire on an ambulance - but it is a joke. It is a bad joke invented by Mr. Bill Kristol and others, by neoconservatives who went in Alaska ...

JOFFE: You give him too much power.

LEVY: ... to fetch her.

JOFFE: You give Kristol too much power.

LEVY: Ah, they went to - it was a last trick. They made the mistake in Iraq. And a little mistake was to go and fetch Sarah Palin.

But McCain president means the possibility of Mrs. Palin president. And this is not possible for such a great country - a woman president who believes that the Great Flood really happened in Las Vegas, in the Grand Canyon. It's crazy. She believes that, that the Great Flood - of course she does.

JOFFE: Come on, come on.

ZAKARIA: Defend Sarah Palin, Jo.

LEVY: And that you have ...

JOFFE: Oh, come on. Listen, this is typical ...

LEVY: She believes that the (unintelligible) ...

JOFFE: No. Come on.

LEVY: ... were the (unintelligible).


LEVY: She said it. The (unintelligible) ...

JOFFE: Ca c'est, en francais, "du bullshit."

Anyway, let's not talk about that.

ZAKARIA: No (unintelligible) you said ...


LEVY: She said it. She said it. She believes that the pipeline in Alaska is blessed by God.


LEVY: That God came to bless the pipeline in Alaska.

JOFFE: No. She said, let us hope, for instance - let us hope that God blesses this and that. She didn't say it was blessed.

She was just being ...

LEVY: This is a way for a Christian to ...

JOFFE: I'm sorry. She is ...

ZAKARIA: You're not troubled by that.

JOFFE: She is religious, and you are not, and the French are not, and Europe is de-Christianizing. So (unintelligible) her ...

LEVY: Barack Obama is religious also.

JOFFE: So, do not make fun of people ...

LEVY: No, no.

JOFFE: ... who believe.

LEVY: Obama ...

JOFFE: I don't believe ...

LEVY: Obama is religious also.

JOFFE: OK. Anyway.

The question was?


ZAKARIA: What do you think of Sarah Palin? That's my question.

JOFFE: I think of Sarah Palin - with the single exception of Cheney, vice presidents don't run U.S. foreign policy.

I would also respectfully disagree with my French friend here. We know exactly what McCain stands for. He's been coming to Europe for 30 years. He comes to all the strategy conferences. He has a record, he has a voting record.

He is, on foreign policy, in some respects more moderate than even Obama is. I mean, he's taken on Obama over ...

ZAKARIA: But he wants to take - he wants to take Russia out of the G-8. He wants to take China out of an expanded G-8.

JOFFE: Look. No, no, no, no.

And he said ...

ZAKARIA: And when he talks about ...

JOFFE: OK. Don't make me do this.

All I'm saying is that he's been more moderate, for instance on Pakistan, where Obama has threatened - and (unintelligible) is much more serious - to actually invade, if they can't get ...

ZAKARIA: So, you think ...

LEVY: Obama understood that Pakistan has a real stake ...

ZAKARIA: All right. So, look.


So, you think that Europe will be pleasantly surprised by ...

JOFFE: I know what his foreign policy is going to be, because he has a record, and the record goes back 30 years.

Above all, I think he is not captive to any particular part of his party, because he has gone up against the Bushies and others often enough, and linked hands with the Democrats across the aisle, that I know he's not going to be presenting us with evil, bad surprises.

ZAKARIA: All right.

LEVY: (unintelligible). It would be tragic.

ZAKARIA: And we will be back.


ZAKARIA: And we are back with our panel, Josef Joffe from Germany, Bernard-Henri Levy from France.

Do you look at Obama and think he is a kind of figure who is going to move the United States politically leftward toward Paris?

JOFFE: Toward Paris?

LEVY: No. That is toward Paris is not so important. And I think that this is one of the junk politics accusations against Obama.

Sometimes they say he is Muslim. Sometimes they say he's French. Maybe the same for these people.

No. Barack Obama is drawing - will be drawing the country towards a new system of market, regulated, with a better health care, with a better care of the average people, and so on. This is not socialism. This is, of course, a trend to the left, but the new left, the left of tomorrow. It's a left going out of the dark times.

My book is entitled "Left in Dark Times." Barack Obama is the left out of the dark times toward really a better future with free market. He is completely faithful to free market. No question on that.

And this is, to be faithful to the real tradition of liberalism in the two ways, two meanings - American and French liberalism since Tocqueville, since Adam Smith - does not mean the law of jungle. It means market with rules. And this is Obama. It is not socialism.


JOFFE: I don't think this was ever a jungle, as the American economy. I once looked at this thick network of regulations of the financial market. And you end up with about eight federal agencies and then 50 single state agencies, each regulating their banking and so on.

But that's just an aside, because, you know, Europeans have this idea that America really is predatory capitalism. And then you tell them, you know, you try to fire somebody in America, it's just almost - almost, not quite as hard as in France.

But to come back to Obama, I don't know what he is going to do and who he - I don't even know who he is. He is a very flexible politician. His identities are also quite flexible, between Harvard Law School and Chicago community organizer. And I've seen various Obamas on the campaign.

You know, the senator was very much to the left for the almost perfect liberal voting record. But in the course of the campaign, the old dynamics began to work, and he moved to the right, he moved to the center, whether on taxes or on Iraq, or what have you.

But the most important thing is why he is not going to bring a modern version of socialism to this country is, this country is going to have enormous deficits. And if you want to be a socialist, if you want to be a leftie, you've got to be able to spend and to tax. And I don't think he can increase the deficit, not after what has happened in the financial crisis.

ZAKARIA: Now, do you think, looking forward, though - you know, people talk about this as the end of capitalism, the end of - are people in Germany and France taking great comfort in saying this means a return to European style capitalism?

JOFFE: Yes, of course they have. Of course ...

ZAKARIA: But of course, European style capitalism has been struck by many of the same problems.

JOFFE: Well, that's the issue. Of course there's problems (ph) further (ph), because the United States, being a very - being powerful in all respects, including cultural power - has forced the Europeans to adapt. And so, the last decade, Europe has also been dragged kicking and screaming into deregulation and a somewhat freer market and more flexible labor markets on a very small degree.

And so, there's a kind of relief now, you know. We can go back to our old ways. We can go back to our old status ways - tax and spend, regulate - and above all, to come back to this intimate relationship between the state and the economy that typifies both French and German capitalism - Rhenish capitalism - this great, intimate relationship between, in our case, the Deutsche Bank or the deutsche government, is back in town again.

So, in that respect, there's relief. But you're absolutely right. Of course Europe is capitalist. Of course Europe is a market to play.

ZAKARIA: And your banks have had as much trouble.

JOFFE: And my - and our banks, including the French ones, have been just as much consumed by greed and excess as American banks, or Swiss banks, or Icelandic banks. And the worst sufferers have been those banks in Germany, in this case, with the highest degree of state government involvement.

ZAKARIA: What about in France? Schadenfreude - is there a French word for that?

LEVY: Number one, I don't believe in - there is no relief. On the contrary, what strikes me is the amount of anxiety in all the leaders of the world, including the Americans.

We are entering in a terra incognita. And all the cute and wise leaders of the democratic countries are aware of that. We are entering in a completely new landscape. Nobody knows what is really happening.

It is not a financial crisis. It is not an economical crisis. It is more than that.

JOFFE: I think ...

LEVY: It is a crisis which implies probably the very way of people being linked together. It is a philosophical crisis.

When you say two weeks ago, when you had this freezing of credit, credit in America, in France, in Germany, to the same world, it has two meanings. Credit means money ...

JOFFE: And faith. LEVY: ... and it means faith and confidence.

JOFFE: (unintelligible).

LEVY: So, what is really at stake today is the faith which the citizens of the free countries have in their societies. So, no relief, anxiety - good anxiety - and a necessary pragmatism.

Of course Obama is pragmatist. We all have to be pragmatists.

ZAKARIA: Thank you both, Bernard-Henri Levy and Jo Joffe.


ZAKARIA: Poland's minister of foreign affairs, Radek Sikorski, has led an eclectic life. As a student in Poland, he was involved in the Solidarity movement and became a political refugee in Britain when marshal law was declared in his home country.

After graduating from Oxford, he became an award-winning war correspondent. To add to all that, Rupert Murdoch relied on Radek's financial advice when investing in Poland. He is married to an American, the Pulitzer Prize-winning Anne Applebaum.

Radek is now back in Poland, serving the democracy he fought for as a student. He was in New York recently, and I sat down with him to talk about Russia.


ZAKARIA: Radek Sikorski, thank you for being on the show.


ZAKARIA: You have been foreign minister of Poland for a few years, and you then find yourself confronted with a situation where Russia attacks Georgia - or, in the Russian version, the Georgians precipitated that attack, but nevertheless, there is a clash between Russia and Georgia.

What's your first reaction?

SIKORSKI: My first reaction is that we failed, as the Western community, to pay enough attention to frozen conflicts.

ZAKARIA: And by frozen conflicts you mean these disputed areas that have kind of never been resolved.

SIKORSKI: Which can unfreeze so quickly.

ZAKARIA: But you don't regard Russia as potentially being able to launch another Cold War. I mean, the Red Army is a shell of what it was. Russia is a much smaller Russia.

Are you scared by Russia? I mean, does Poland ... SIKORSKI: Many people are. And, you know, Karl Marx coined the phrase that great historical events usually happen twice over - first as a drama, second as a farce.

It's in nobody's interest to start a new era of confrontation. I personally believe that Russia should be a member of the broadly defined West.

We have many issues in common on the north-south axis - mass migration, epidemics, climate, terrorism, you name it. So, a revival of some kind of tension on the east-west axis would be an anachronism.

You know, countries sometimes do what's bad for them.

ZAKARIA: Robert Gates, the secretary of defense, made a speech recently in which he said something which struck me. He said NATO should be very careful about making new commitments to members, but it should instead focus on honoring the commitments it has made.

The way I would translate that is, it should be careful about extending membership to Georgia. What it really should focus on is making sure that it can protect Poland and the Baltic republics.

Do you agree that countries like Poland, new members of NATO, have not been sufficiently given the kind of wherewithal to defend themselves in case of an attack?

SIKORSKI: I think that, now that the dust is settling on the clash between Georgia and Russia, we do have to think about the outcome, and very carefully, because one thing that the Russian Federation has certainly achieved is to make us think in a more disciplined way.

I think the time at which we could dispense security guarantees with a secure hope that we will not have to act on them has just ended.

ZAKARIA: But that means that you worry about extending a security guarantee to Georgia that might not perhaps be possible to uphold.

SIKORSKI: Well, think about that. We certainly want a situation in which, when NATO gives someone a security guarantee it is credible. And we should think about what to do to achieve that.

ZAKARIA: Do you think that the Western Europeans have been less willing to confront Russia on some of these issues, and that there is a divide - to use Donald Rumsfeld's famous phrase - between New Europe and Old Europe?

SIKORSKI: Well, depending on what you mean by that. Now, that New Europe has been defined either as the new member states of NATO or the E.U., or New Europe as the pro-American part of Europe, or New Europe as the enlarged Europe, which is the definition that I would prefer.

We have to think about our security seriously again. We need to get back to basics in NATO.

I think we should have less political correctness in our intelligence assessments.

ZAKARIA: What does that mean?

SIKORSKI: We shouldn't be afraid of calling a spade a spade. When our people say that some countries increased their defense budgets exponentially, we shouldn't be afraid of saying that it's a concern.

ZAKARIA: So, let me ask you directly. You're referring to Russia.

SIKORSKI: Russia has been increasing its defense budget very quickly.

ZAKARIA: Do you think that the French and Germans in particular are reluctant to do something confrontational, because they have economic ties with Russia?

SIKORSKI: Well, they - you know, look. It is only natural that we are more sensitive to these issues, because we are a border country of NATO. And we are weaker than some of the bigger states in Europe.

We also have an important commercial relationship with Russia. We have 14 billion euros of trade with Russia, and we don't want to endanger that. We want better relations with Russia more than anybody else, because we would pay more for a decline of those relations.

But hoping for the best, alliances are also about preparing for conditions in which your hopes may be disappointed.

ZAKARIA: You watch Russia very carefully. What do you think is going on? Is the country moving backward in every respect in terms of political reform, in terms of a rise of nationalism, a rise of militarism? Or is this a period of transition still, and things may work themselves out?

SIKORSKI: Well, I think the time at which we could confidently say that Russia was definitely moving towards our kind of society, our kind of rules, I'm afraid is over.

We now seem to have a model of also internal integration of society by reference to external threats. That's not good. That's not a - that's not something that gives Russia's neighbors confidence.

ZAKARIA: A final question. Radek, you were a journalist, a political activist. You are now foreign minister of Poland. What does it feel like to be on the other side of the fence, as it were? What has struck you the most about this role as Poland's foreign minister?

SIKORSKI: Oh, you should try it too, Fareed.


It's very educational once your journalism doesn't (ph) needed (ph). But I found that it improved my journalism to see the world from the decision maker's point of view. You see the limitations of office, and also how decisions are actually made.

ZAKARIA: In ways that have made you a better foreign minister?

SIKORSKI: I hope. "Inshallah," as they say.

ZAKARIA: Radek Sikorski, a pleasure to have you on.




ZAKARIA: Fifty-two years ago this week, Israeli armed forces moved into Egypt. And thus began what is now called the Suez Crisis.

A few months earlier, Egypt's leader, Gamal Abdel Nasser, had nationalized the Suez Canal, through which half of the world's oil supplies passed every day. The move was directed in large part against Britain - the dominant power in the region, and the towering military presence in Egypt.

Nasser had been making anti-British noises, signing arms deals with communist powers, trying to force Britain out of Egypt, and the British government saw an opportunity in the Suez nationalization to strike back. London met secretly with France and Israel, and hatched a plot to take control of the Suez Canal.

Militarily, the plan worked very well. But military power wasn't enough. Britain was deeply in debt to the United States - a consequence of World War II - and as a result, was very vulnerable to American pressure.

After the Eisenhower administration condemned the British attack in the United Nations and in other diplomatic fora, it informed London that it was going to start selling its reserve of British pounds. As a result, the British government accepted a cease-fire, and the prime minister, Anthony Eden, announced his resignation at the same time.

As the United States adds to its debts, and countries like China, Japan, Russia and Saudi Arabia continue to buy this debt, it's worth keeping in mind that there are political as well as economic costs to our growing foreign indebtedness. So, five years from now, if we find ourselves locked in a conflict with China - say, over Taiwan - let's just hope the Chinese don't start selling dollars.

That's it for this week.

Before I go, I want to thank you all for your e-mail. Last week I asked you a question: How long do you think this economic mess will last? I asked you to choose either one year or four years - the two durations of the recession that I had heard mentioned by prominent economists.

Most of you were not optimistic. You said four years. Some said even longer.

One e-mail started like this. Never ask a historian how bad things can get. It was written by Michael McHugh, author of a book called "Exploring American History." He gave a compelling and scary argument for a very long downturn.

Now, my new question to you this week. Vice presidential candidate Joe Biden has been widely criticized for saying that, if Barack Obama is elected, world leaders will test his mettle with some kind of crisis in the first year of his presidency.

Do you think this is true? And does it scare you?

Let me know what you think.

Also, I want to recommend a book. It's called "What It Takes," by Richard Ben Cramer. It came out back in 1993, but it's a wonderfully personal account of what it's like inside a presidential campaign. So, as we get into the home stretch, read this book.

Remember, you can e-mail me at fareedzakariagps@cnn.com. You can also visit our Web site, cnn.com/gps, for highlights from this program. And you can always find our weekly podcast on the Web site.

That's it. Thanks, and I will see you next week.

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