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Fareed Zakaria GPS

Interview With Zalmay Khalilzad; Panel Discusses Global Economy

Aired December 21, 2008 - 13:00   ET


FAREED ZAKARIA, HOST, GLOBAL PUBLIC SQUARE: This is GPS, the GLOBAL PUBLIC SQUARE. Welcome to all of you in the United States and around the world. I'm Fareed Zakaria.
First, a few thoughts on this week's news.

The shoes that were seen around the world were, of course, those of the Iraqi journalist, Muntadhar al-Zaidi, who threw them at George Bush in the president's final visit to Iraq. It seemed a telling image for the administration's Iraq policy, but in several senses.

President Bush is right to point out that it represents a huge advance in freedom in the Middle East. There is quite simply no other Arab country in which that scene could have taken place. And Iraq has, in many other ways, become a reasonably open and democratic society, though still a long way from a liberal democracy as we would define it.

But what the shoe-throwing incident also reminded us of -- and this is something that Americans often forget -- is that whatever the gains in Iraq recently -- and they are real and undeniable -- the costs for Iraqis have been huge.

We often focus on the costs to America -- hundreds of billions of dollars spent, more than 4,000 lives lost -- but the costs to the Iraqis have been staggering.

2.5 million Iraqis -- 10 percent of the population -- have fled the country, and only a few are trickling back. Another two million have been displaced from their homes. Tens of thousands of Iraqis have been killed and wounded, perhaps many more.

Now, maybe in the long run, if Iraq becomes a more decent society, these costs will fade into memory and the benefits will endure. But for now, as Muntadhar al-Zaidi's actions showed, it is the costs that remain front and center in the Iraqi consciousness.

Meanwhile, in a wonderful act of reverse cultural imperialism, it seems that this strange Iraqi custom is now taking hold in the United States. Earlier this week, at a meeting of New York City's Metropolitan Transit Authority, an angry protester was dragged out as he attempted to throw his shoe at the Authority's CEO.

His last words before security got to him were, "This shoe is for you." On the program today, we have America's ambassador to the United Nations, who was its ambassador to Iraq, and before that to Afghanistan. We can talk to him about everything.

Plus, a panel of experts on the economy.

ZAKARIA: My guest today, a great American diplomat, has an incredible life story.

Zalmay Khalilzad was born in Afghanistan, came to the United States as a scholar, became a citizen, went to work at both the Defense and the State Departments. He rose to become the U.S. ambassador to Afghanistan, then Iraq, and now serves as the United States' permanent representative to the United Nations, which also makes him the highest-ranking Muslim in the United States government.

Welcome, Mr. Ambassador.

ZALMAY KHALILZAD, U.S. AMBASSADOR TO THE UNITED NATIONS: Oh, it's great to be with you, Fareed.

ZAKARIA: We could talk about so many things, because you have covered the entire swath of what was -- what we probably call the Greater Middle East.

But let me start -- during the presidential campaign, there were these rumors that circulated that Barack Obama was a Muslim.


ZAKARIA: And Colin Powell went on "Meet the Press" to say, look, he's not a Muslim.


ZAKARIA: He's a Christian.


ZAKARIA: But the really important thing to say is, so what if he's a Muslim?


ZAKARIA: Now you were watching this. I wondered whether people realized, as these were many Republicans, that their ambassador to the United Nations was actually a Muslim.


ZAKARIA: How did you react when you heard all this?

KHALILZAD: Well, I very much share the sentiments of Secretary Powell on that issue. I was offended at times, as well, given not only myself having served as the U.S. ambassador to Afghanistan, to Iraq, to the U.N. And I know many other Muslims who have served with distinction and putting their lives at risk -- so, to raise questions about their suitability, if you like, to aspire to be the president of the United States one day.

But I have had the great honor and privilege -- as a Muslim, as an American -- to represent the United States in Afghanistan, in Iraq and now in the United Nations.

But it didn't set right with me when -- some of those comments, yes.

ZAKARIA: Do you think that being a Muslim has, you know, has helped shape the way you've been able to interact with these places around the world? I mean, I would think it would be an advantage, that you would know the culture, you understand -- you have a certain intuitive understanding of these regions.

KHALILZAD: Well, I -- of course, everyone, whether Muslim or Christian or Jewish, have had their own personal styles. And I have always behaved as what would make sense from an American interest point of view, what the policy is and how can one get from here to there. I've never been satisfied with just being able to articulate what that policy is, but to also make progress toward achieving the goal, be result-oriented.

And the fact that you know the culture and how you can move people from X to Y has been helpful. But in my sort of interactions with other than (inaudible) have not been conscious always -- "Oh, I'm a Muslim. Therefore, I should do this or that."

No. I have felt -- I mean, I represent the United States. I'm the American ambassador. I have a mission that I need to carry out. I have people that I'm responsible for, whose security I have to worry about.

And I have had great Americans of all faiths that have been part of my team. This is what America is really about. And this is why America is such a unique country.

You know, people in Afghanistan or in Iraq, or in some other places where I have gone, are a little surprised by us. And the election of President Obama has even surprised them more as to...

ZAKARIA: Do you think -- do you think President Obama, the fact that he is the son of a Kenyan immigrant, or the fact that he is the stepson of an Indonesian, that he lived in Indonesia -- does it give him some special perspective?

KHALILZAD: I'm sure it does, because, you know, your perspectives are shaped by all your experiences. And those experiences, I'm sure, whether he's aware of it or not, I'm sure is part of what has made him to be the person that he is.

And there is a lot of goodwill out there in the United Nations, where I am now, among the 192 tribes that constitute the United Nations, towards him. But ultimately, of course, it will determine on the policies and the execution of policies, and what is delivered. But he starts with a lot of goodwill.

ZAKARIA: What was your reaction when you saw that Iraqi journalist throw his shoes at President Bush?

KHALILZAD: Well, it was obviously a mixed emotion. On the one hand, this lack of respect, this hostility to the president, of course, was -- especially as he was visiting Iraq -- was disconcerting, certainly. And I know it was painful to Prime Minister Maliki. And many Iraqis who have been in touch with me since expressed that.

But at the same time, it showed that, you know, Iraq has become a very different place. I cannot imagine something like that taking place when Iraq was governed by Saddam Hussein.

So, there is -- freedom has its cost. But I think it was -- certainly, it was also a painful incident.

ZAKARIA: Why do you think the Iraqi government seems intent on prosecuting this journalist so zealously? President Bush has made clear, he doesn't think it's a big deal at all. He thinks it's a minor incident.

Are the Iraqis trying to demonstrate their commitment to the alliance with the United States?

KHALILZAD: Well, I don't know. I mean, that may be one, this anger and pain that I talked about that some feel about what happened. They find that to be embarrassing to them.

But at the same time, they're talking about laws that exist in terms of insulting a head of state, a visiting head of state.

But there is disagreement in Iraq as to exactly what to do. And...

ZAKARIA: Did you give them...

KHALILZAD: ... we don't...

ZAKARIA: Did you give them any advice on what to do?

KHALILZAD: No, no. No, I have not given them any advice.

ZAKARIA: When you were wooing the Sunnis, and you talked to people, both the political side, some who had military backgrounds, Baathist backgrounds...


ZAKARIA: ... did you find that they were allied with the United States, or were they allying with the Shia government, if you see what I mean?

Because what I wonder about is, when we leave, they will be stuck with the Shia government, not with -- you know, we'll be a smaller and smaller presence in Iraq.

KHALILZAD: Well, I think that the biggest challenges I faced when I was reaching out to them was their mistrust of U.S. intentions in the first instance. They thought that 9/11 had been carried out by Sunni Muslims, Arabs, and that we had taken revenge on them, on the Sunnis in return by turning over their country to the Shia, pro- Iranian elements.

And I was always trying to argue with them that most Americans don't know the difference between Shia and Sunni, that we don't think like them, and they shouldn't project their way of thinking onto the United States, that we wanted Iraq to work. And that Iraq could not work, if the Sunnis did not participate and the Sunnis opposed that.

And, in fact, their opposition to the change in Iraq, and attacks on the coalition, have kept us so focused on the Sunni areas, that we did not have, given the limitation of our forces, enough to focus on what was happening in the south. And in a sense, they were facilitating what they were arguing against, which is increased Iranian influence.

ZAKARIA: And then, when you talked to the Shia -- or at least when I would go to Iraq and talk to the Shia -- they thought that the United States was not being hard enough on the Sunnis, and was comfortable with the idea of a return of a Baathist general.

KHALILZAD: They had, some of them, very much of a zero-sum view of things. And they didn't see that there was a positive outcome for the Sunnis to accept this new democracy. The new system in Iraq was to the benefit of the Shia, since they had the numbers, but at the same time, that they had to share power.

Some were motivated, clearly, on the Sunni side by nostalgia, and some on the Shia side, unfortunately, by revenge.

It's also important to recognize -- and I'm sure you do, Fareed -- that they face huge issues -- how to share trillions of dollars' worth of oil and gas resources, among other things. How to organize the government -- central, local government -- how much power in each.

So, it is not surprising that they have difficulties, given from where they have started. Under Saddam, local representatives, representatives of communities, did not sit across the table to argue these things. And they are doing that now, and they are having problems. And each side would like to have the U.S. to side with them against the other. And our role has been to facilitate

And also, we are turning it over, increasingly, this responsibility -- which is an important point, and I worked on it since I've been here at the U.N. -- to turn it over to the U.N., because all sides trust the U.N. -- at least some sides do -- more than they trust us. And they can be a better facilitator with regard to some of these political issues than we are.

For example, they are working on the elections, on a constitutional amendment process. We are not as much in the middle of things, as the 500-pound gorilla, as we were two, three years ago. Now, I think the U.N. is coming forward more to play an increasing role.

ZAKARIA: And we will be back with Zalmay Khalilzad in a second.


ZAKARIA: And we are back with Zalmay Khalilzad, the United States' ambassador to the United Nations.

Zal, you were also the ambassador to Afghanistan. In fact, you were the man who organized the Afghan government in Bonn, and then became ambassador some months later, in Kabul itself.

One thing on which both candidates seemed to agree was that we needed more troops in Afghanistan. Yet I'm not clear what exactly our mission in Afghanistan is.

Are we trying to rebuild the Afghan state -- or build an Afghan state, centralized state that really has never existed? Are we merely trying to prevent al Qaeda from forming a base? Are we trying to destroy the Taliban in every element, everywhere that it exists?

What do you think our mission should be in Afghanistan?

KHALILZAD: Well, our mission should be to assist the Afghans establish a state that works. And that means a state that can prevent al Qaeda from using its territory against Afghans and against the world. And that is our strategic interests.

But to achieve that goal, the Afghan state institutions need to be strengthened. We have agreed to increase the size of the Afghan army. We have to recognize Afghanistan is a very poor country. It's not like Iraq.

So, to sustain a kind of force that it needs, it has to be subsidized by the international community. And that's one. So, strengthening Afghan institutions.

Two, until they can do that on their own, there is a need for increased forces that we have agreed to deploy with coalition partners, in order to not only be able to clear in the area, but also to be able to hold and build.

Afghanistan is a very large country. It's the size of Iraq. But the forces there are much smaller, the total of number. The Iraqis have 600,000 security forces.

Now, one of the reasons for success in Iraq on the security front is, besides the Sunni positive development, has been the growth in the capabilities, numbers of the Iraqi forces. So, that's two, to make sure the military strategy can be implemented -- that is, a good relation between ends and means.

ZAKARIA: But when we talked about the Iraqi case, one of the crucial parts was, as you said, the Sunni shift. KHALILZAD: Yes.

ZAKARIA: And you were able when you were there to begin this process of dividing, you know, the good Sunnis from the bad Sunnis, the irreconcilables from the ones we could talk to.


ZAKARIA: Should we be adopting a similar strategy towards the Taliban; that is, trying to figure out which elements of the Taliban are truly interested in a global jihad against us, and which ones may be unsavory local characters or maybe not, and ones we can deal with? Should we be talking to the Taliban?

KHALILZAD: Well, I think that there are two things that are important with regard to the Taliban and al Qaeda there.

One is that we have to recognize that the central gravity of al Qaeda activity is now in that area, of Afghanistan-Pakistan region. The two have become intertwined, the two countries. Although Iraq remains important to them, but the shift there -- clearly, the focus is there on that region.

And in order to deal with the Taliban part of it, besides going after al Qaeda militarily, is to get the situation in which the Taliban cannot use sanctuaries across the border from which they can launch attacks.

So, therefore, Afghan...

ZAKARIA: Across the border meaning in Pakistan, which they then use to come into Afghanistan.


And similarly, of course, Afghan territory should not be used against Pakistan. So, there is a need for cooperation between the coalition, Afghans and Pakistan. That's vital for winning...

ZAKARIA: But what about talking to the Taliban?

KHALILZAD: That's the other element. I think we need to reach out to elements of the Taliban who are reconcilable.

But to achieve success with regard to that, work in other cases would show that the government and the coalition need to be in a much stronger position...

ZAKARIA: Than they are now.

KHALILZAD: ... than they are, to be successful. I think it's an important part of ultimate success.

But I think one needs to get ones own house in order. The government needs to do better in terms of dealing with corruption, making sure that the forces that constitute the new government stay together rather than polarize.

ZAKARIA: But you know these people. You think there are people in the -- there are elements of the Taliban that are reconcilable?

KHALILZAD: Oh, I think the conditions will be, first of all, make some reconcilable and some not. So, it's very much contingent. But I do believe there are forces within the Taliban personalities that are reconcilable. But some of them already have come across.

We started by -- we -- I mean, during that period. I was there. This initiative had started, and the commission got underway. And some people came across.

But it's also, for that to succeed, also this issue of cross- border issue is important. If the sanctuary was at risk, I think that would increase the incentive for reconciliation substantially. And...

ZAKARIA: Do you think the Pakistani military is doing everything in its power to stop these sanctuaries from being created in Pakistan?

KHALILZAD: I think the recent efforts have been very encouraging. I think the relationship also at the political level is very encouraging between presidents Karzai and Zardari. I know that President Zardari is very much committed to cooperation on this effort, and we need to build on that.

Clearly, always, we are of the view, more can be done and should be done. But I think the recent trends are encouraging.

And the attack in Mumbai has the risk, if it is not managed well, to divert the attention of Pakistan from the west, on Taliban and al Qaeda, to the east. And so, therefore, it's very important strategically...

ZAKARIA: To India.

KHALILZAD: ... towards India -- so, it's very important strategically that those who are responsible are prosecuted for the Mumbai attack, that the two countries cooperate also against this common enemy of extremism and terror.

ZAKARIA: There are many Afghan watchers who say that the biggest problem we have is that the United States is backing the wrong horse, that President Karzai's government is weak, it is corrupt, it is dysfunctional.

How do you react?

KHALILZAD: Well, I think there are problems with the government. There is not question about that. But there are also problems with some of the approaches of the international effort there. And both need to be addressed for success to be achieved.

And, of course, as I mentioned, the critical element is the regional dimension of relations between Afghanistan and Pakistan on the sanctuary issue. I think, for success to be achieved at the manageable costs and in a manageable timeframe, all three need to be addressed.

ZAKARIA: And we will be back with Zalmay Khalilzad in a second.


ZAKARIA: And we are back with Zalmay Khalilzad, the United States' ambassador to the United Nations -- previously to Iraq and Afghanistan.

One regional approach toward Afghanistan that worked very well when you were involved in the negotiations was reaching out to Iran. You spoke with members of the Iranian government. They helped in the American invasion of Afghanistan in the sense that they provided political cooperation.

Did you find them cooperative?

KHALILZAD: On times, yes. At times they were cooperative, at times they were not.

But I found those discussions -- in Bonn, in setting up the government, and then when I had the authority as ambassador in Afghanistan to talk with them -- useful.

But there were other times that they did not play a positive role.

When I went to Iraq, I asked President Bush for the authority to do the same there, and he granted me that authority. And it took a while for us to be able to arrange meetings. The Iranian interests, as time went on, was in a broad discussion of all issues.

ZAKARIA: They wanted to talk about everything...

KHALILZAD: Everything.

ZAKARIA: ... with the United States.

KHALILZAD: Nuclear issue, Afghanistan, Iraq, Lebanon, Israel, Palestine.

ZAKARIA: Why shouldn't we do that?

KHALILZAD: Well, of course, the decision at that time on our part was that we would do that, provided that they deal with the nuclear issue, accept the freeze. The secretary of state made that point repeatedly, that she would even participate in a broad dialogue with them, once they accepted...

ZAKARIA: But you were allowed...

KHALILZAD: ... the idea of a freeze.

ZAKARIA: You were authorized only to speak narrowly on Iraq. KHALILZAD: On Iraq. That was -- and they...

ZAKARIA: Were they productive on that -- on that (inaudible)?

KHALILZAD: Well, we never -- they couldn't -- we didn't have, really, a serious conversation on it, because we never could agree on that. Because we said only Iraq, and at a particular time, and they would say, no, everything, we would have to talk about everything.

I think that the Iranian issue is one of the most important issues affecting that area. And I think this is one of the challenges that the new administration will face, how you deal with an Iran is an issue that has multiple dimensions -- its nuclear program, its regional activities -- from Afghanistan to Iraq to Lebanon to Palestine -- and its desire to be the preeminent regional power. And it's the new fault line regionally between Sunni Muslims and Shia Muslims that's also affecting interaction across the region.

So, this, the Iranian challenge, will be only second, in my judgment, from the regional importance, to the Afghanistan-Pakistan issue in terms of the priority that the new team will face.

ZAKARIA: What would you recommend President Obama do with regard to relations with Iran? You know he has talked about possibly opening these wider negotiations with them. How would you structure them?

You've actually talked to the Iranians. What do you think would be most productive?

KHALILZAD: It may be that a nuclear-alone discussion isn't going to get us to where we need to be. But the nuclear issue is very important -- we have to recognize that -- as part of a broader discussion, and a willingness to put more pressure to bear also on the table, as sort of both in engage and contain kind of -- to engage, sort of, if you like, is required.

But I also would say to the incoming team that they -- don't expect a lot to happen very quickly. This is a very tough player, Iran, very crafty. It can play on multiple tracks at the same time. And while I don't oppose engaging them on specific issues, but it will also require substantial pressure and the ability to bring others along.

But to have, I think, a clearer enunciation, a more effective enunciation, that we're not against the peaceful part, and assurance of fuel supply can be done and communicated much more effectively.

ZAKARIA: Zal, thank you very much for doing this.

KHALILZAD: Well, thank you. It's nice to be with you.

ZAKARIA: And we will be back.


ZAKARIA: Joining me for our panel discussion today, Nassim Nicholas Taleb is a writer, a philosopher and a Wall Street money man.

Moises Naim is an expert on the global economy and the globe itself. He's the editor-in-chief of "Foreign Policy" magazine.

John Bruton is the European Union's ambassador to the United States. In a prior life he was prime minister of Ireland, where he presided over much of the Celtic Tiger's striking economic growth in the 1990s.


Let's jump right in -- the auto bailout.

John, I mean, your experience in Ireland as prime minister was -- it was relevant here. British Leyland, as you know, the British government spent I think $18 billion propping up British Leyland. It went bankrupt anyway, because at the end of the day, it made stuff nobody wanted.

Is it worth keeping the auto industry afloat?

JOHN BRUTON, EUROPEAN UNION AMBASSADOR TO THE UNITED STATES AND FORMER PRIME MINISTER OF IRELAND: That's one example. And it is an example that proves the thesis, although some parts of what was British Leyland are still in existence and working. But most of it failed.

But there's a counter example, which is that of Renault, where the government of France put in money at around the same time. And that company has been successful.

MOISES NAIM, EDITOR-IN-CHIEF, FOREIGN POLICY MAGAZINE: Detroit produces cars that do not have enough buyers. Period.

And so, unless something happens that creates a product that is wanted by the world and by Americans, the only solution is to just keep them afloat just to keep people employed.

So, think more -- think about it more as welfare and income maintenance, income support for people who would otherwise be unemployed. And then cross your fingers and hope that there will be a restructuring down the road when there is more recovery, where those people employed now by the car industry can be employed either by other, more competitive car companies, or in other sectors.

NASSIM NICHOLAS TALEB, AUTHOR, "THE BLACK SWAN": Let me tell you what I see here that bothers me immensely in all these bailouts, which is why (inaudible) reaction, OK.

I think you cannot have capitalism by having bailout as a punishment. Where is the punishment? OK.

Why should we bail out Citibank, and Bob Rubin made $100 million of bonuses, OK, getting into hidden risk? It blows up. He keeps his $100 million.

Me, as a taxpayer, I've got to pay for it, OK -- without punishing them.

And also, how come -- why are we bailing out Citibank -- hence, Bob Rubin and all these people -- and we're not bailing out the restaurant owner who just failed, for the families to feed? OK?

Stanley O'Neal from Merrill Lynch, he kept his bonus. We are bailing out, indirectly, Merrill Lynch.

We should have -- this is what's bothering me. In this practice of bailout, we should not have bailout as a punishment.

NAIM: But you realize that that can be psychologically comfortable, and I agree. Yes, you know, they -- but at the same time, it doesn't solve the problem. The numbers -- you know, even if all of them return to bonuses, you still haven't solved the problem. You can't have -- you have created some psychological comfort, some perhaps moral repayment...

BRUTON: I would agree that there must be no private gain by anybody from the bailout. But I think the financial system is different from bailing out a restaurant.

The financial system is like the electricity grid. It's a public utility. And certain public utilities need to be maintained, and one needs to find a way of doing it.

In the '40s, they did it by nationalizing them when they failed -- public transport, public utilities like electricity, as it is in many countries. The banking system is a similar, basic utility, which you must have.

ZAKARIA: Let me ask about the collapse of commodity prices. Moises, you do geopolitics as well as geo-economics. What does -- what does the collapse of commodity prices mean for Russia, for Iran and for the country of your birth, Venezuela?

NAIM: It's huge. And actually, that is the theme that is going to be the headline in 2009 in a variety of ways. The theme that we're going to see in headlines is the political fallout of the economic crisis.

And some commodity exporters are going to feel it, and they're going to feel it hard.

ZAKARIA: Like whom?

NAIM: Like you just mentioned it, the world for Mr. Putin or President Ahmadinejad, or President Chavez, when the oil is trading at $40, $50. And they have very expensive political life styles. They need a lot of money to support their policies and their role in the world.

So, that will have consequences. But other countries will also have political fallout of the crisis.

China, it's now predicted, anticipated that it's going to grow at about 6, 7 percent next year. What's very -- you know, growing at 6 percent is fantastic for most countries. For China, it's a crisis, because the legitimacy of the Chinese government depends on generating 24 million jobs a year through growth. If that growth shrinks, and the number of -- or the unemployment rolls swell, China is going to be destabilized.

And so, you can go through the list. We have Pakistan. Pakistan is a country that is in social turmoil. And then, if you add to that social turmoil a financial crisis, then you add to the complexity.

So, in different ways, next year, we're going to see the political fallout of the economic crisis.

ZAKARIA: Does this add to the downward spiral potential for unexpected surprises?

TALEB: Exactly. What -- and just to tell you that, a year ago, or two years ago, nobody would have predicted this. So, you have to imagine that next year or the following year, there's no model for what's going to happen. There's absolutely no model.

Things that we think we believe may be very bad are not necessarily bad. Lower commodity prices are quite beneficial for people, you know, because there's like anybody with cash has -- the value of his cash, his or her cash, increases dramatically in terms of...

ZAKARIA: Lower oil prices are good for most consumers...

TALEB: ...(inaudible) expressed (ph) in (ph) oil prices.

ZAKARIA: ... though they are bad for a regime...

TALEB: And lower -- exactly. So, lower commodity prices, definitely, is probably bad for Ahmadinejad. OK? It's not a bad thing for us. The world oil prices may be bad for some states.

So, lower commodity prices -- look at inflation, the middle class experience in this country, the CPI are -- not reflected in the CPI. Prices of computers went down. The price of wine, the price of protein, the price of -- these are coming back down.

So, here we have -- and the people who have been punished are the very rich, paradoxically this time, a lot more than -- like the oligarch punished the...


TALEB: The upper class are very rich.

ZAKARIA: We've got to take a break. We will be right back with our panel of experts.


ZAKARIA: We're back with our panel -- Moises Naim, John Bruton and Nassim Nicholas Taleb.

Nassim, you wrote a book called "The Black Swan." And the basic idea was, everybody looks at swans and assumes they're white. That is to say, looks at the normal world and forgets that there might be these totally unpredictable events that change everybody, that swans might be black, as they are apparently in Australia.

So, you predicted the financial crisis in some measure. Are we beginning to see white swans again? In other words, are we returning to normalcy?

TALEB: I don't know what you call normalcy. Let me tell you the problem we had. In fact, I wasn't so much predicting as I was doing something quite different from predicting, is gauging the incompetence of a pilot, OK, and saying, if you have an incompetent pilot, this will invariably lead at some point in time to crash.

ZAKARIA: And the pilot being?

TALEB: The pilot being the Federal Reserve, being -- the entire banking system was incompetent at the time. It's still incompetent today.

It's like, if you know a pilot doesn't understand storms, flying a plane, he'll crash a plane. The same is -- today, we have the same people in charge today. The same people who did not understand that you had a massive buildup of hidden risks in the banking system are today -- today -- running this bailout.

So, you have a problem.

ZAKARIA: So, now the question is...

NAIM: The question is...

ZAKARIA: ... how do you restore confidence?

NAIM: Right.

ZAKARIA: And how do you restore growth?

NAIM: Right.

BRUTON: That's going to (inaudible) sign off on something.

NAIM: And how do you minimize the collateral damages produced by these medicines we're using now? We are using tools that are going to create consequences long term.

Remember that today's crisis was in part created by the solutions to prior crises.

In 1987, there was a market, a stock market crash. And so, liquidity was injected, and that created a bubble. Then the Asian crisis, the Asian financial crisis was solved with more liquidity. Then the dot-com had a big crash in telecommunications. That was solved with liquidity. And the bubble kept growing until we now are where we are.

So, we need to be very careful that the solutions that we're applying to the current crisis do not become the seeds of the next crisis.

BRUTON: I think the important thing is, as you have just said, is that this is all interdependent globally. And it's an entirely new situation, because in the 1930s, it was individual economies that went into trouble, rather than -- there wasn't such a degree of inter- effectiveness.

But I think what's hopeful is that all of the major economies are going to meet again on the 2nd of April in London. That wouldn't have happened, were it not for the crisis.

So, in a sense, something that was overdue -- the beginnings of a form of global financial governance -- came about in part as a result of the crisis.

ZAKARIA: So, who's doing well, when you look at the world? I mean, I'm struck by the -- the country that I'm most struck by in terms of the speed and scale of what they have done is China. China has cut interest rates quickly, massively. It's announced a fiscal stimulus that is not, you know, 1 percent of GDP, or 2 percent, as we have, but 15 percent of GDP.

Is that the kind of thing that should be being done?

TALEB: We still don't know how these policies work in a complex world. We still don't know. We still don't understand.

The nation-state, I tell you, is in such -- we have to recognize we're in unchartered territory. The nation-state no longer exists today.


TALEB: The government of the United States has to bail out...

ZAKARIA: But these guys -- but policymakers have to act. What should they do?

TALEB: The traditional tools, as we sit down, maybe do nothing. All right. Should -- may be an option. The traditional tools no longer, OK, work.

So, we have to sit down and reassess, study before acting. To not -- just it's reacting.


BRUTON: But I think we have to study very quickly, because otherwise you could have a spiral downwards -- the loss of confidence in the financial markets, creating a loss of confidence, and all sorts of things that were perfectly viable losing credibility, as well.

NAIM: And the notion that the current, that the traditional tools do not work is a hypothesis. We don't know that.

ZAKARIA: Yes, but what if...

NAIM: You don't know...

ZAKARIA: ... it did work?

NAIM: You don't know that throwing all the money that governments are throwing into the economy, that lowering interest -- the monetary reaction, the fiscal reaction -- we don't know. It may be that in 2009, we're sitting here and saying, wow, it did work.

And, you know, yes, there are traditional tools. But something we learned from the Great Depression is that, when this happens, you know, you have to gamble on spending money and hoping that the recovery generates a dynamism that then helps you cover the fiscal deficit.

ZAKARIA: But do you think that the Chinese have moved most...

NAIM: Yes.

ZAKARIA: ... successfully (ph)?

NAIM: I think that the world -- there is a fiscal reaction. Some lagging, you know, Germany is still lagging, and others are lagging.

But in -- and one had hoped that the G-20, when they met in Washington, would have agreed on synchronizing their fiscal public spending to generate more dynamism. That didn't happen. The governments are acting on their own.

So, we're still waiting. The Chinese were ahead of the pack. They announced a big fiscal stimulus before the G-20. We are expecting -- President-elect Barack Obama announced the contours of its recovery plan, that is going to be massive. It's going to be centered on infrastructure and green infrastructure, on sending money to states and local governments.

You know, it may not work. But listen. If that doesn't work, we are in a different planet with a different dynamism, that we have a larger problem than what we now know.

ZAKARIA: Well, let's look at Japan. Japan spent a lot of money on infrastructure. It didn't really do much.

TALEB: We are on a different planet than once they think we are. And that's my problem. We are on a different planet. There's still people...

ZAKARIA: But on your planet, what should we do, then?

TALEB: On our planet, the first thing you would do immediately, OK, the first, it's fine to print money. You reduce debt progressively. You work on the... NAIM: But that's happening. That is already happening.

TALEB: We focus on the debt, introducing policies that may or may not have backfire. OK. You have to be much more conservative, because you don't want to do what Greenspan does. You know, you're sitting on a raft. You run to one side of the raft...

ZAKARIA: So, but let me understand. You're really saying, take the pain.

TALEB: Take some pain...

ZAKARIA: Mend your habits. Get your debt down.

TALEB: Get the debt down. Take the pain and...

ZAKARIA: But is it fair to say this was Herbert Hoover's solution to the Great Depression?

TALEB: I don't talk about things I'm not an expert in.

ZAKARIA: No, but I mean, that was the -- the orthodox economic response to the Great Depression was, you know, liquidate the bad investments, liquidate bad assets, and then over time the healthy economy will come back.

TALEB: Yes, but the Great Depression was a sample of one. OK. We're using a sample of one. We have one single historical precedent. And I don't think it corresponds to what we have today. So, we don't know what worked then, whether it will work today, because of a sample of one, or because the environment changed.

ZAKARIA: All right. On that note, thank you all.

We'll be right back.


ZAKARIA: And now, the response to last week's question of the week.

I asked you what you thought was the most important international story of 2008. The number one choice was the global financial meltdown. Many of you specifically mentioned an event that you believe triggered the crisis: the United States government's allowing of Lehman Brothers to collapse.

A close second in our unofficial poll was the U.S. presidential election. A lot of you expressed strong hope that Barack Obama would bring great change in American foreign policy.

An honorable mention goes to the viewer who felt that the most important story of 2008 was the premier of this program. Thanks. We think it was big, too, just not that big.

I don't have a question for you this week, because I thought it would be good to take a break for the holidays, for you and for our staff. But I do have a book I want to recommend, or rather, a number of books -- a holiday booklist.

At this time of year, everyone's looking to buy a book for a friend or a loved one, so I put together a list of some of my favorites from this year. I have recommended many of them on this show earlier.

I'm going to take the liberty here and recommend my own book, which, not surprisingly, I think is pretty good. If you like the program, I think you'll like the book.

And also, a new book by Newsweek columnist, Jonathan Alter. It's called "The Defining Moment," FDR's first 100 days -- a great read, full of stories you haven't heard, and particularly interesting as Obama's first 100 days are about to begin.

Remember, as always, you can visit our Web site,, for highlights from this program, our weekly podcast and some conversations that are exclusive to the Web site. And you can also e- mail me at

Thanks for watching. Have a great week.