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Fareed Zakaria GPS

Interview With Robert Rubin, Paul O'Neill; Interview with Hamid Gul

Aired August 08, 2010 - 10:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

FAREED ZAKARIA, HOST: This is GPS, the GLOBAL PUBLIC SQUARE.

Welcome to all of you in the United States and around the world.

I'm Fareed Zakaria.

So here's what I've been thinking about this week.

You know that ever since 9/11, the United States has been trying to engage in a battle of ideas against radical Islam. Now, America can't really get involved in a debate within Islam, so that means finding and supporting moderate Muslims.

This is a cultural struggle that has been warmly supported by liberals and conservatives. In fact, many conservatives have argued that we should be engaged in a much more extensive and expensive effort to fund moderates and delegitimize radical and violent Islam.

Under both the Bush and Obama administrations, there have been active efforts worldwide to support Muslims who are trying to rescue their religion from extremists, fundamentalists, and jihadis. And this has meant funding mosques, Islamic centers, imams, and community leaders who share a peaceful and pluralistic vision of Islam, except, it turns out, if they are in our own back yard.

The debate over the proposed community center to be built a few blocks away from the World Trade Center has missed this fundamentally important point. If this community center were being built anywhere else in the world, chances are the U.S. government would be funding it.

The man behind it, Imam Feisal Abdul Rauf, has spent years trying to offer a liberal interpretation of Islam. His most recent book, "What's Right With Islam is What's Right With America," argues that America is actually what an ideal Islamic society would look like because it is peaceful, tolerant, and pluralistic. His vision for Islam, in other words, is Osama bin Laden's nightmare -- we should be encouraging such an Islamic center, not demonizing it.

Now, there is of course the much more fundamental issue, freedom of religion in America, which is a founding principle of this country. The most eloquent and intelligent defense of that principle came last week from New York's mayor, Michael Bloomberg, in an address that should be required reading in every civics class in America. There have, on the other hand, been politicians who have shamelessly and shamefully capitalized on the public's wariness. The public is wary understandably because there has been so much disinformation about this center.

But perhaps the most puzzling stand was taken by the Anti- Defamation League, which was founded to support the freedom of religion. The director of the ADL, Abraham Foxman, explained that the victims of 9/11 had feelings on this matter that should be respected even if they were irrational.

First of all, there were many dozens of victims of 9/11 who were Muslim. Do their feelings count? More important, are irrational feelings, prejudices, hatreds OK because those expressing them are victims or see themselves as victims? Will the ADL defend the rights of Palestinian victims to be anti-Semites?

I have to say I was personally deeply saddened by the ADL's stand, because five years ago the organization honored me with its Hubert Humphrey Award for First Amendment freedoms. Given the position that they have taken on a core issue of religious freedom in America, I cannot in good conscience keep that award.

So this week I'm going to return to the ADL the handsome medal and the generous honorarium that came with it. I hope this might spur them to see that they have made a mistake, and to return to their historic, robust defense of freedom of religion in America, something they have subscribed to for decades and which I honor them for.

On the program today, a very special event, two secretaries of the Treasury, Robert Rubin and Paul O'Neill, on what it's going to take to fix our economy.

Then, a man directly accused in the WikiLeaks documents, Hamid Gul, the former head of the Pakistani Intelligence Service. Did he conspire with the Taliban?

(BEGIN VIDEO CLIP)

HAMID GUL, FMR. HEAD, PAKISTANI INTELLIGENCE SERVICE: It's incorrect. I totally deny this. It is absolutely crap. There is no truth to it.

(END VIDEO CLIP)

ZAKARIA: And will there be another war in the Balkans? We'll talk to the Serbian foreign minister.

Finally, the U.S. and Iran face off. You might be surprised at who won.

Let's get started.

We've talked a lot on this show in recent weeks about the future of the economy, the divide between Republicans and Democrats, between Main Street and Wall Street, between big business and President Obama. So here we have two former secretaries of the Treasury, one Republican, one Democrat; two former chief executives, one from a great manufacturing company, one from a great Wall Street firm, to talk about those divides.

Robert Rubin was co-chairman of Goldman Sachs before President Clinton tapped him to be the 70th treasury secretary. And Paul O'Neill was chairman and CEO of Alcoa and chairman of the Rand Corporation. Then in 2001, President Bush asked him to be his first secretary of the treasury.

(BEGIN VIDEOTAPE)

ZAKARIA: Welcome, gentlemen.

A lot of people in the business community say we're not investing. And I've talked to CEOs and, as you know, Bob, I wrote a column about this. They say we're not investing because of uncertainty. And not just economic uncertainty, but the uncertainty surrounding what Obama is doing.

It is the health care bill. We don't know what that's going to mean for us. Financial reform, we don't know what that's going to mean for us.

Do you think that's a fair point?

ROBERT RUBIN, FMR. TREASURY SECRETARY: I think it's a fair point that there is a -- there is some strain in the relationship between the business community and government. If I were the business community -- and I would start with that, if I may -- I think I would start and look at what Obama's actually done. And I think what he's actually done -- let's leave health care aside for the moment because it's a complicated issue. I happen to think they've got a bill with a lot of interesting pieces in it, but Paul is very, very knowledgeable and has some very interesting views on that.

But I think if you look at what they did with the stimulus and dealing with financial institutions, I think they brought us back from the brink. Financial reform I think is a very sensible piece of legislation, although I think there are other things we need to do.

But I think if you put it on a yellow pad, I think they look pretty good. In fact, I think they actually look very good. But there clearly are a lot of strains.

And I think the business community needs to understand the tremendous pressures that the Obama administration faces from all the kinds of issues and the concerns of 300 million Americans. And I think the administration, for its part, needs to have a better understanding of the problems that business is facing and try to relate to those more.

So I think they both have a way to go, and I think both of them have to work to find some way of interacting more effectively, because I think there is a real strain, and the strain and uncertainty has a confidence effect. And I think that really does affect investment and hiring.

ZAKARIA: Paul, one of the things people are trying to figure out is, is this economy moving, where does it stand? And the key issue seems to be, is business hiring?

You ran Alcoa for a long time. As far as you can tell, what's happening and what needs to happen?

PAUL O'NEILL, FMR. TREASURY SECRETARY: I think we're moving forward at a pretty gradual pace, but I don't think things are terrible. I must say I'm kind of amused by some of the conversation about companies hoarding $1.5 trillion worth of cash, or something, because I had a rule when I was in the private sector for 25 years, including 13 running Alcoa, and that is, don't hire people unless you have somebody demanding goods that you can't produce with the people you already have. Right?

So it seems patently unrealistic to me to urge people to spend money unless there's a demand that they're not able to satisfy with their existing resources. So --

ZAKARIA: And capacity utilization -- that is, the plants and factories are not at full capacity.

O'NEILL: Exactly. So there are still a lot of plants that are shut down or running on partial schedules. And until there's a reabsorption of that latent capacity, people are not going to build new capacity.

Why would you? I mean, it's crazy. It's not a charitable function if you're running a business to say oh, my goodness, we have so many millions of people unemployed, I should rush out and spend my cash and hire more people if there's no demand for the goods. It's crazy to me.

ZAKARIA: Last week on "Meet the Press," Alan Greenspan said, "I've been around Wall Street since 1949, and I have never seen the venom that is now directed from Wall Street toward government."

What do you think -- and he ended by saying, "I don't know what it's about, frankly. I'm puzzled."

O'NEILL: I don't know. It's puzzling to me. In a way I think it's beside the point.

You have to be careful not to generalize from your own experience, but I have to tell you, when I was in big enterprises like International Paper and Alcoa, I kept a wary eye on Washington, but my decisions were not guided by research and development tax credits and whatever mischief they happened to be up to at any particular moment.

I paid attention to customers and potential customers, and getting more people to use our product around the world, and investing in places that were friendly to expansion and things like that. So I think an awful lot of this conversation about as though Wall Street's upset with Obama, it's all -- it's because people don't have something sensible to talk about, I suppose. I don't think there's much merit to that conversation.

And back to what Bob was saying, let me take on the issue of financial regulation reform.

We didn't do anything about the stupidity of continuing to give people access to home mortgages with 3.5 percent down, which is what the FHA is doing now. If we really want to protect the financial system, we should not make it possible for people to get a home mortgage unless they have 20 percent down payment, and then we won't have another cratered system.

ZAKARIA: So the incentives on the mortgage side were, at the end of the day, the kind of big elephant behind the financial crisis.

O'NEILL: Well, you know, we compounded problems. We went around and got people to sign -- if you could breathe, you could get a mortgage. Right? You didn't have to have any money down; somebody would fabricate something, you could get a mortgage.

Is it a surprise that that collapse -- and that the collapse got calamitous when we quickly went through the thin equity people had because they kept taking equity out on the basis of ever-rising prices? You know, we created this calamity.

And then the financial community compounded the problem by securitizing this stuff, calling it triple A, putting it into cyberspace. It's no wonder that we cratered the world financial system. What we were doing was stupid.

ZAKARIA: Now, a lot of people feel that the people who helped create this atmosphere of deregulation are now cleaning it up, and they look specifically at you, Bob. I'm looking at a column by Paul Krugman, and he says -- and his argument is there hasn't been enough financial regulation reform. "Did all the senior members of the economics team have to be proteges of Robert Rubin, the apostle of financial deregulation?"

What do you say to that?

RUBIN: Well, let me make two comments if my may, Fareed.

First of all, I am not the apostle of financial deregulation. Quite the contrary.

On derivatives -- and I think you and I have discussed this -- derivatives, I developed a deep concern about the systemic problem that was created. When I was back at Goldman Sachs, it was a concern I had, and thought we should increase marginal capital requirements, a concern I had when I was in government. And, in fact, when I wrote any book in 2003, I was so concerned about it, that I actually included that discussion in there.

We have now had a crisis, a terrible crisis, the worst since the 1930s. And we now have the political possibility -- well, we've now done it because we've enacted financial reform. And financial reform was imperative. I don't believe it was politically possible because of the interests of Wall Street. And now that we've had the crisis and had financial reform, I think we've taken very meaningful actions.

ZAKARIA: Let's talk about moving forward, though.

You say fundamentally -- and I'm sure Bob agrees -- the problem is demand. You don't have enough consumers buying things, and that's why business isn't spending, which is why it's not hiring Americans.

If you could wave a magic wand, how would you create more demand in the economy?

O'NEILL: I wish that the political system and particularly the present leading members of Congress would work on setting things right so that the world and Americans can see that there's a brighter future down the road starting with things like fundamental tax reform. You know, when I was secretary of the Treasury, I was on this cause to create fundamental tax reform. Unfortunately, my client didn't agree with me.

ZAKARIA: Your client being the president.

O'NEILL: Exactly, because I kept saying, you know, the tax code we have is proof that we're not an intelligent people, and it's worse now than it was 10 years ago, when I was singing this song. So I think the president could earn a lot of credit and could make a huge difference if he would lead the charge for fundamental tax reform.

You know, and ideally, if you think about how you get capital formation, you get fairness in the distribution of paying for public goods, if we had something simple instead of the current income tax and corporate income tax, something simple like a VAT or a consumption-based tax, I think that would give reassurance to the markets that we're coming back and we're creating the basis for capital formation and savings, as opposed to consuming everything in sight.

ZAKARIA: One of the things that you that mentioned to me in the green room which I think is striking is that one of the advantages of the VAT, or the national sales tax, is there's very efficient tax collection. You said that when you were at Treasury, the estimate was that the United States did not collect $400 billion in taxes? Is that --

O'NEILL: Per year.

ZAKARIA: Per year.

O'NEILL: Per year. And it cost us $300 billion across the society to administer the colossal mess we've got. No intelligent people would invent this if they were given a chance to create a tax system that was worthy of people who need to free up resources that are being wasted.

ZAKARIA: Bob, if you had a magic wand, what would you do to get this economy moving? People look at your tenure as secretary of Treasury, where with all the controversy, you created 22 million jobs. Now, maybe you would say that government doesn't create those jobs, and I agree. But those jobs were created on your watch.

So do you want to share the magic sauce with us?

RUBIN: Well, I'll respond to your question in the current context, but I will say this -- it was a remarkable period in the '90s, and I think President Clinton was terrific on economic policy. And I think that made a real contribution.

But let's now talk about the current context, which is quite different. Here's what I would do, Fareed. And it's been this debate that's going on right now.

I think what you I would do is I would stay on, roughly speaking, the current fiscal track, because we still have large fiscal deficits, and that does create demand, although those deficits are coming down, so you're actually reducing the demand.

ZAKARIA: So you mean you won't spend more on a second stimulus right now?

RUBIN: I wouldn't do a major second stimulus because I think -- and I think Paul said the same thing. I wouldn't do a major second stimulus because I think we run a risk that it could be counterproductive in creating a lot of additional uncertainty and undermining confidence.

But at the same time -- and what I'm about to say is easy to say and very hard to do -- at the same time, I would try over the next six months to put in place a very serious beginning of deficit reduction that would take effect at some specified time in the future. And I would guess something like two years.

So it wouldn't take effect right now, when the economy is still so vulnerable, but if you could do it and it was credible, and people believed it, and it was real, I think that could do a lot for confidence. The problem is that's very easy to say and very hard to do.

ZAKARIA: And on that note, we will be right back to speak with both of the secretaries of Treasury.

(END VIDEOTAPE)

(BEGIN VIDEO CLIP)

O'NEILL: I was strongly opposed to the Bush tax cut that was enacted in 2003. It's one of the reasons I got fired. You know, between that and saying there was no evidence of weapons of mass destruction in Iraq, those were pretty significant causes to get fired.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE) ZAKARIA: And we are back with two secretaries of the Treasury, one Republican, one Democrat -- Paul O'Neill and Robert Rubin.

So we were talking about what we would do going forward to get this economy moving. One thing that has to be decided right now, or very soon, is what to do about the Bush tax cuts.

Now, Paul, this happened under your watch, but this is a famous moment in your relationship with your client, the president. You were not really in favor of those tax cuts.

O'NEILL: No. In fact, I was strongly opposed to the Bush tax cut that was enacted in 2003, and it's one of the reasons I got fired. You know, between that and saying there was no evidence of weapons of mass destruction in Iraq, those were pretty significant causes to get fired, which I was happy to get fired for, because I was pretty convinced that the third tax cut didn't make sense for a number of reasons.

First of all, I believe we needed the money to smooth the way for fundamental tax reform, for fixing Social Security and Medicare, with the prospect of another 9/11 -- this was a year after 9/11 -- and with the then active prospect of going to Iraq. I didn't think we could afford another tax cut. And so, you know, I got dismissed, which was, as I said, OK with me.

So, what do I think about the tax cuts and whether they ought to prevail? You know, I have to tell you, I don't think it's the right issue.

The right issue is fundamental reform of the tax system. So, if we let the Bush tax cuts expire, are people going to say "Hallelujah, now our tax system is OK"? Not me. I'm going to say it's still the same stupid tax system and it's not the right issue.

So if the president wants to --

ZAKARIA: But it's not a binary -- at this point you've got a golden opportunity. You've got $300 billion --

O'NEILL: I don't care. I honestly don't care. But I do care whether the president takes the lead in saying this is not the right issue, it's off the table, they're expired. You know, everybody's going to pay more taxes. I don't -- you know, I did the arithmetic not too long ago and figured out since 1980, I've paid $85 million worth of taxes. So I don't mind paying taxes.

ZAKARIA: I bet you Bob could match you on that.

O'NEILL: More than that. More than that, I'm sure.

ZAKARIA: But let me ask you this. On the Democratic side there is also -- I mean, on the right, there's the pandering to supply side economics, in my view. On the left, there is this pandering to the idea that, well, of course we have to maintain all the tax cuts for the middle class. The truth of the matter is we couldn't afford -- in my view, we couldn't afford them in 2001, 2003, we still can't afford them. If you only -- if you preserve all the tax cuts for everybody but those, the top two percent or three percent of America, you lose about $250 billion of revenue.

Shouldn't we just let them all expire?

RUBIN: I'll tell you what I would do. And I think you've framed it very well, Fareed.

I would put an estate tax in place right now, immediately, because we have no estate tax right now. There is no supply side effect in having an estate tax. And we should fill that void.

Number two, I would increase the tax on the higher brackets, those top two brackets, and bring them back up to the Clinton rate. I believe there's no supply side effect there. We did it in 1993, people said we were going to destroy the economy, and in fact we had the longest expansion, economic expansion, in American history.

I would leave the middle class tax cuts intact for a limited period, because I do think that the probability is higher that we're going to have slow and bumpy growth than vigorous growth, and I think that given the vulnerability, the high unemployment rate, one thing and another, I wouldn't want to have that contractive effect right now.

ZAKARIA: But part of the problem here is the politics of it. Getting things done with the two parties seems to me even harder than when you were secretary of Treasury, and it was pretty partisan when you were secretary of the Treasury.

RUBIN: I think it's a real problem, Fareed. All of these things are very difficult politically. I think our country's at a crossroads. I really do. I think we have tremendous long-term strengths, I think we can be very successful long term, but we have got to face all these different issues and --

ZAKARIA: And when you look at the politics where you can't get -- the Republican senators who created the deficit reduction panel voted against it because Obama supported it.

RUBIN: Almost any long-term political system will say that it's deteriorated substantially in terms of the willingness to work across party lines and the willingness to make tough decisions.

ZAKARIA: How worried are you about this issue of Republicans and Democrats finding it impossible to come together?

O'NEILL: You know, in a perverse way it may be a blessing, because if they could agree on something, it would probably be negative to the people.

You know, I agree with Bob. I first went to the Executive Office Building next to the White House in 1967, when Lyndon Johnson was president, and I've been in and out of that place now since 1967.

I think it is really tragic what happened to our political system and its inability to have even a civil conversation so that just as you point out, Fareed, the Republicans abandoned the idea of this presidential commission to struggle with these fiscal issues. What kind -- that's insane. Right? I mean, it's really hard to understand how -- what seemingly are otherwise intelligent people could participate in this folly when the country's at risk.

I just came back from China about 10 days ago. You know, you may not like everything that's going on there, but boy, they've got the wind in their sails and they're growing like 10 percent and 11 percent a year, which is good for their people at the end of the day.

Hey, we need to stay on top of the world, and we deserve to do that if we can get our act together. But we're not -- our political system really tragically broken right now.

RUBIN: But I think it's more -- can I just say one thing, Fareed? I think it's more than just a question of Republicans and Democrats working together. I think we need to have a willingness to make politically hard decisions.

You know, Thomas Jefferson said -- and this is a paraphrase, not a quote -- that in a democracy, elected officials only make difficult decisions if they're held accountable by an informed public. An informed public is a function of the interests of the people themselves, and it's a function of the media and the content of the media.

I actually think Obama has done a lot given the circumstances in which he has been operating. But he now faces these enormously complex issues we've just discussed. And I think we've all got to try to find some way to help make this system work better.

ZAKARIA: Well, at the very least, we had a civilized conversation.

Paul O'Neill, Robert Rubin, thank you very much.

O'NEILL: Thank you.

ZAKARIA: And we will be back.

(END VIDEOTAPE)

(BEGIN VIDEO CLIP)

ZAKARIA: General, you've seen these documents, or you've seen the excerpts. And let me just ask you one very specific one. It says in one of these documents, "During this meeting, Gul claimed he dispatched three individuals to Kabul City to carry out IED attacks."

Is any of this true?

GUL: Not at all. It's preposterous. It is disinformation. (END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: Some people have called General Hamid Gul the father of the Taliban. He led Pakistan's Intelligence Service, the ISI, and worked closely with the CIA during the Soviet occupation of Afghanistan to arm and train the Afghan Mujahideen. He's been back in the news because of the WikiLeaks documents that claim that he met with al Qaeda or the Taliban in Pakistan to order attacks against allied forces in Afghanistan and to plot to set Kabul aflame.

He has offered to answer these charges in an American court. I first thought he might answer some questions here on GPS.

General, you've seen these - these documents, or you've - you've seen the excerpts, and let me just ask you one very specific one. It says in one of these documents, and this is an army report, "On the 17th of December, 2006, there was a meeting between senior members of the Taliban leadership, which included General Hamid Gul, former head of the ISI. During this meeting, Gul claimed he dispatched three individuals to Kabul City to carry out IED attacks."

Is any of this true?

HAMID GUL, FORMER CHIEF, PAKISTAN'S INTELLIGENCE SERVICE: Not at all. It's preposterous. It is disinformation, and I would grade it as a deliberate attempt by the - whoever intelligence reporting was. It was a deliberate attempt to misguide.

It's incorrect. I totally deny this. It is absolutely a crap. There's no truth in it.

ZAKARIA: So what do you think is going on? Because the odd thing here is these are documents that were not meant to come - to become public. These were internal army reports from one army officer to another. Could they have gotten it so badly wrong?

GUL: The sources, I think, are very dubious, and because they are paying a lot of money, so this is called paper milling, that you make believe what you want to actually acquire, or what's - what's in your mind. Or, I think the source is -

ZAKARIA: So explain - explain that for a second, General Gul. What you're saying is because the Americans offer large sums of money to Afghans for, quote/unquote, "intelligence" the Afghans in effect make up stories so that they can sell this to the American -- to American army and intelligence officers? Is that correct?

GUL: Yes. That's right. They are - they are very clever. The Afghans (ph) are very clever. Don't misunderstand them. Don't misread them. They have retained their independence because they've been always very treacherous.

They are brave. They are good fighters. They are independent- minded. But they're also very treacherous. I think Churchill has said the last piece from them, that never trust an Afghan, he will do anything for money. But then, at the end of the day, he will come back with the original line.

ZAKARIA: You were involved in - in the creation of the Mujahideen. How do you read the Afghan Taliban right now? Is this a nationalist Pashtun movement with which the - the United States or the Afghan government, Hamid Karzai, can negotiate, or is this a diehard al Qaeda-affiliated organization that is, you know, only interested in - in victory at any cost?

GUL: This is a national resistance movement. It should be recognized as such. They are Mujahideen of Afghanistan, as they were during the occupation by Soviet Union of Afghanistan. And I think they are gaining momentum, gaining strength by the day. And this should be now understood properly.

ZAKARIA: And what would you do? If you were advising General Petraeus, what is the path? Is it negotiate with the Taliban? Is it simply leave? How would you resolve the situation?

GUL: Well, I would - instead of advising General Petraeus, I would advise President Obama, who came in on the promise of change, on the promise of shifting focus from external engagement to domestic problems, but he has unfortunately not been able to do it. I think President Obama's speech in Cairo I think in May of 2009 was a very good speech, and I thought and I - in fact I commented on it - that his demands are very legitimate.

He says - he said in that speech that if we have no threat to America from that part of the world, we are prepared to pull out every single soldier from there. There is only one man who can give the guarantee that there will be no terrorism exported from Afghanistan. Neither Karzai nor somebody else, not even Pakistani government, nobody can give you the guarantee.

One man who can give the guarantee is Mullah Omar because he symbolizes today the Afghan resistance. He has to be talked to. Don't talk to Karzai. He's a puppet.

You have to - there has to be a talk between the party - parties of the conflict. There are two parties to the conflict, one is America, allies of course are only the - the pallbearers, and then there is Mullah Omar. You have to talk to him, and I'm sure it will work out very well.

ZAKARIA: All right. General Gul, thank you for taking the time.

GUL: Thank you, Mr. Zakaria.

(COMMERCIAL BREAK)

ZAKARIA: And now for our "What in the World" segment. So what got my attention this week was Mahmoud Ahmadinejad's invitation to President Obama to join him face to face in a debate on the issues that divide the two nations so severely. Now, the invitation itself was just a stunt. He's written letters like this before and the White House of course dismissed it. But I think something interesting is going on in Iran. I think that the sanctions are beginning to make the Iranian regime sweat.

President Obama implied as much this week, and I think he's right. Two months ago, the U.N. Security Council imposed what the president called were the toughest sanctions ever faced by Iran. This set of sanctions included new controls on Iranian banks so that the international banking system couldn't be used as a way to fund Iran's nuclear programs. Also part of the deal were new inspections of Iranian cargo on the world's oceans, asset freezes on 40 Iranian entities, restrictions on the Revolutionary Guard's companies and activities, and a lot more.

Now, President Ahmadinejad responded to these latest U.N. sanctions with one of his classic quotes. He said that the sanctions were, quote, "like a used handkerchief that should be dumped in a garbage can," and dismissed them as nothing but, quote, "annoying flies." I wonder where he makes this stuff up.

But then, the U.S. turned the screws tighter with its own unilateral measures against Iran, aimed at the nuclear program and Iranian support of international terror. And, the European Union has followed suit as well, with its own round of sanctions targeting Iran's financial system and the backbone of its economy, oil and gas. Australia, Canada and Japan put forward their own sanctions as well.

And now, some unlikely allies are joining in. The United Arab Emirates, once a major hub for Iranian business, is cracking down, stopping the once voluminous illegal trade with its neighbor across the straits of Hormuz and cracking down on businesses with links to sanctioned Iranian entities.

On Iran's southeastern border, Pakistani media have reported that all major Pakistani banks are refusing to do business with their neighbors in Iran for fear of being penalized. And Russia, once a key ally of Iran, supported the sanctions at the U.N. level and appears to now be enforcing them, refusing to sell Iran key military components.

If you read some of the tea leaves, all this screw tightening does seem to be having an effect. The White House says that Iran is having serious problems enriching uranium now, Iranian ships are reportedly lying idle in ports because the sanctions make financing and insurance so difficult, and exports become expensive. A strike by merchants started in the bazaars of Tehran has spread to other cities.

And, on the political side, not only did President Ahmadinejad so kindly offered to debate President Obama, but he also said Iran is now ready for, quote, "effective cooperation" to settle its nuclear dispute. Then, this week, he said Iran was ready for a nuclear swap and to sit down in September with IAEA officials and representatives of the U.S. and other nations, of course, only on its own terms.

Now, we've been down this road many times before. We've heard Ahmadinejad say things like this before. Will this make Iran end its nuclear evasions? Who knows? Perhaps not. But someone in Iran is probably tallying up all the costs of these sanctions and the costs of maintaining its current course, and that'll have an effect one of these days.

And we will be right back.

(BEGIN VIDEO CLIP)

ZAKARIA: You are being criticized in - in the parliament by people who say you should be taking military action.

VUK JEREMIC, SERBIAN FOREIGN MINISTER: Well, this has been always a position of certain elements of Balkan societies, that it is only through war that you can resolve these issues.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

CANDY CROWLEY, CNN ANCHOR: I'm Candy Crowley, and here are today's top stories.

NATO is reporting that three U.S. service members were killed in Southern Afghanistan. Two died in an insurgent attack, and the third was killed by a bomb blast. That brings the death toll for NATO coalition troops to 11 for August.

North Korean officials have seized a South Korean fishing boat with seven people aboard in the East Sea. That's according to South Korean state media. The announcement came amid tension between the divided Koreas over the South's naval drills and the marked sinking of a South Korean warship.

In Northwest China, more than 100 people are dead, some 2,000 missing, after heavy rains triggered massive landslides. Residents sought higher ground on their roofs as they waited to be evacuated.

Those are your top stories. Up next, more FAREED ZAKARIA GPS. And then on "RELIABLE SOURCES," Howie Kurtz sits down for an exclusive interview with Hugh Hefner.

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ZAKARIA: If you think war in the Balkans was just a 1990s phenomenon, you could be mistaken. It could happen again. Some nationalist lawmakers in Serbia are calling for war to regain control of neighboring Kosovo. At the heart of the issue is Kosovo's unilateral 2008 Declaration of Independence. Serbia thinks Kosovo is still a part of Serbia and has said it will never recognize Kosovo as an independent nation under these circumstances.

About a third of the U.N. nations have recognized Kosovo, including the United States and most of Europe. Russia, China, India, Brazil have not recognized it. And some of them are working to reverse the declaration of independence. Serbia's foreign minister, Vuk Jeremic, has just come from the U.N., where he has been lobbying nations to take his side in this struggle. He joins me now.

JEREMIC: Hi.

ZAKARIA: So tell me, is it your view that there is a possibility that this could be - things could get so unstable that there is some kind of a war in the Balkans?

JEREMIC: Well, for as long as this government of Serbia is in office, we are going to continue renouncing the use of force, or any unilateral action as a way to resolve this issue. We committed ourselves to the peaceful way of resolving it, but -

ZAKARIA: But you are being criticized in - in the Parliament by people who say you should be taking military action.

JEREMIC: Well, this has been always a position of certain elements of Balkan societies, that it is only through war that you can resolve these issues. But this government of Serbia has made a precedent in the Balkan history. We are using exclusively diplomatic, political and legal means to push forward our point of view for the first time in the very long history of wars and conflicts in the Balkans.

ZAKARIA: And what is your argument about why Kosovo should not have made this unilateral declaration?

JEREMIC: Well, if this prevails, this would have been the first time in the history of the United Nations that a breakaway territory achieved statehood without consent of the parent state. If this happens in the case of Kosovo, tomorrow it can happen anywhere in the world.

ZAKARIA: So in other - in other words, in other cases where there have been breakaway regions that have achieved independence, it has been with the consent of the parent state?

JEREMIC: In every single case so far since we have the International Order of 1945 under the U.N. Charter. This would be the very first time. So we are now fighting not only for our political and constitutional and democratic point of view, Serbian, but also we are now in a struggle to prevent such a dangerous precedent from taking place.

Serbia's prepared to enter serious negotiations, serious dialogue with Kosovo officials (ph) that is going to yield a compromise solution. We're not going to say no in advance to any solution. The only one thing that we are saying no to adamantly is no to the unilateral declaration of secession.

ZAKARIA: Now, you have - it seems, you know, certainly, from the United States, the western world, it - it looks as though everybody has supported Kosovo independence, but in fact, I was struck when I was looking this up, Russia is adamantly opposed, China is adamantly opposed, India is adamantly opposed, Brazil is adamantly opposed, most of Africa is opposed, and in all these cases, of course, these countries are worried about the precedent which is they have regions that are restive within their nations.

So at the end of the day, you've got a pretty strong set of supporters on your side.

JEREMIC: Well, right now, two-thirds of the world is not recognizing Kosovo as independent state, despite heavy diplomatic pressure that is currently being applied to some of the -

ZAKARIA: From the west.

JEREMIC: From some of the recognizing states, so that these nations change their position. But in the end of the day, what we need to do is to try and bridge this divide. Right now, this is a deeply divisive issue that divides the Security Council, divides the U.N. member states. It divides the E.U. It divides NATO member states. It divides every single, regional and international organization. The only way to close this divide is to arrive at a mutually agreeable solution.

ZAKARIA: But let me ask you about Serbia, because most people's memory of Serbia is Milosevic, and it's the Serbia of the '90s. But the Serbia you represent in yourself is different. I mean, you - Serbia has now been a democracy that in fact has been growing pretty fast. How do you feel personally when people think of Serbia today as Milosevic's Serbia? Because you were actually an opponent of Milosevic.

JEREMIC: Well, I mean, I'm not having a right to be personal when I deal with things as a foreign minister. But if you ask me as a human being, sometimes I'm deeply insulted because I was part of the opposition movement that actually at some point risked our life to defeat Milosevic.

You know, the entire leading structure of Serbia, led by the president, President Boris Tadic, who was arrested by the Milosevic regime, we were fighting very hard to overthrow this dictatorship. And the last thing that we are prepared to take is to associate ourselves one way or another with that kind of thinking, with that kind of regime.

ZAKARIA: And now what do people think of you in the councils of power all over the world? Because you must be the youngest foreign minister in the world. What are you - you're 35?

JEREMIC: I'm 35 right now. Well, I've been around for three years and this Kosovo thing was so intense that by now I've had a chance to talk to most of the people. So by now they know that - that I'm a - I'm a guy who represents officially Serbia. By now they've - they've known me.

ZAKARIA: Mr. Foreign Minister, to speak to you in your official title, thank you very much for joining us.

JEREMIC: Thanks so much indeed. Thanks a lot. Great pleasure.

ZAKARIA: And we will be right back.

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ZAKARIA: Now for our "Question of the Week". Do you think the Islamic cultural center should be built near Ground Zero? Let me know what you think.

Don't forget, as always, subscribe to our podcast on iTunes. That way you'll never miss a show. You can't beat the price. It's free, whether you get the video or the audio version.

Now, as always, my book of the week is by my guest earlier today, the Former Treasury Secretary, Robert Rubin. He wrote a great memoir that covered his two distinguished careers, both in - on Wall Street and in Washington. It's called "In an Uncertain World: Tough Choices from Wall Street to Washington."

It was written with Jacob Weisberg, a great writer, the editor of "Slate" and the two men weave a compelling tale that has many lessons for today, particularly in how to think about risk, whether you're dealing with political risk or with economic risk.

And now for "The Last Look". Lest you think Iran is completely down and out after watching our "What In The World" segment, Iran and the U.S. went head to head recently in a very different arena. The drums of battle were beaten. But this was a contest settled not by missiles but by muscles. You see, a team of American athletes recently traveled to Iran to take part in a wrestling tournament. Wrestling is wildly popular in Iran, one of the national sports.

And the title match featured an international showdown. Iran versus the U.S. Who won? Well, let's just say there's always next year, America.

Thanks to all of you for being part of my program this week. I will see you next week. Stay tuned for RELIABLE SOURCES.