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Fareed Zakaria GPS

What Will Obama Say in Inaugural Address?; Obama's Plan for U.S. Economy

Aired January 18, 2009 - 13:00   ET


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.
We have a great show for you today, but first a few thoughts.

This is the last program that we will do while George W. Bush is president of the United States. And whatever history's judgment will be, he leaves office the most unpopular president in modern history. Different people have been angry or disappointed by Bush for different reasons -- Iraq, Guantanamo, Katrina, torture, all of the above.

But I think the single most significant bad decision George Bush made came early in his presidency. It was a decision widely applauded at the time, and with much bipartisan support.

Remember the Bush tax cuts? Well, think about their effect on America.

In 2000, the Clinton administration had almost balanced the federal budget, and the nonpartisan Congressional Budget Office was projecting that over the next 10 years the United States would have surpluses that would add up to $5.6 trillion -- yes, trillion.

By the spring of 2002, two thirds of that projected surplus had evaporated, and the rest disappeared soon thereafter.

There were many reasons for this, out-of-control spending being one. But by far the lion's share of the surpluses went into the tax cuts.

It was the most profoundly unconservative act of the Bush presidency. Rather than pay down the debt or save in the good times for the inevitable bad times, Bush squandered it all, so that all of us, particularly the high-income earners, could just indulge in a bit more consumption.

And now, when times have gotten bad and when we sorely need those reserves, we're clean out of cash. The federal budget deficit will likely range over the next few years between $1.2 and $1.8 trillion. That's trillion.

We have a great show for you today -- Peggy Noonan, Pat Buchanan, John O'Sullivan and Rik Hertzberg on how to write a great inaugural address. (BREAK)

ZAKARIA: The very first thing Barack Obama will do as president is give a speech. It will set the tone for his time in the White House, lay out his loftiest goals, his firmest beliefs. The speech will be parsed, dissected, examined from every angle, judged by history.

So, who in the world would want to write such a speech?


Let's ask four people who might have. Joining me now are Peggy Noonan, who wrote speeches for President Reagan, and she is currently a columnist for the "Wall Street Journal."

Rik Hertzberg, a speechwriter for President Carter, currently is senior editor at The New Yorker.

Pat Buchanan, a speechwriter for Nixon and Reagan, and currently a political analyst for a rival network.

And John O'Sullivan, who was Margaret Thatcher's speechwriter and is currently the executive editor for Radio Free Europe/Radio Liberty.


Now, I want to be clear. All of you have had incredibly distinguished careers. But I am now taking you to the point where you were speechwriters. I mean, Pat Buchanan ran for president himself.

But, Peggy, when you were writing for Reagan, the memorable line, the memorable line, is that usually something that comes from the president? Or is it the speechwriter? Or is it a kind of collaboration?

PEGGY NOONAN, "WALL STREET JOURNAL" AND SPEECHWRITER FOR PRESIDENT REAGAN: Oh, a collaboration, combination, luck. Sometimes it's something -- the principles that the president said along the way. Sometimes it's something you have perceived about their lives and how they have lived.

PAT BUCHANAN, POLITICAL COMMENTATOR AND SPEECHWRITER FOR PRESIDENT NIXON: Let me -- I think Peggy is not giving herself enough credit, because I was communications director...

ZAKARIA: You were her boss in the Reagan administration.

BUCHANAN: I'm not her -- well, I was overseeing...

NOONAN: Yes, he was.

BUCHANAN: ... when the Challenger disaster occurred. And I went in and told Reagan about it at about noon, right after we were having lunch with all of the State of the Union correspondents. And it hit. And then we waited about an hour. And we decided we were going to have to cancel the State of the Union, called in Peggy Noonan. And would say, in about an hour-and-a-half she had produced the speech that Reagan delivered that night, that some believe was the finest speech he ever delivered.

It was brief. It was beautiful.


RONALD REAGAN, 40th PRESIDENT OF THE UNITED STATES: We will never forget them, nor the last time we saw them, this morning, as they prepared for their journey and waved goodbye, and "slipped the surly bonds of Earth" to "touch the face of God."


ZAKARIA: Did you think that up? Did Reagan? How did that part work?

NOONAN: That was sheer intuitive hunch. And I knew that if I heard it on the air, it was because the hunch was correct, and if not, not.

There was a marvelously -- a wonderful and popular poem from the days when poems were popular, in the 1940s, called "High Flight" about the joy of flight. I learned it when I was in the seventh grade, when they taught poetry to seventh-graders.

It came into my mind the afternoon we were working on the speech. I thought to myself, that is exactly the kind of poem that Ronald Reagan would know. He would've loved it.

And so, I put it -- I thought of it, because it fit in to a part of the speech. I put it in, thinking, if I hear that in a few minutes on TV, it's going to be because Reagan knew it well.

Indeed, he called me after the speech and said, "How did you know I knew that poem?"


I thought, oh, that's good.

It was sheer luck.

ZAKARIA: Now, sometimes the speech gets remembered for things that aren't in it.


Jimmy Carter's malaise speech does not have one word: malaise. So, how did it get remembered as the malaise speech?


HERTZBERG: Malaise is a word that had a quality that Carter could not stand. It was French.


HERTZBERG: And it was highfalutin, and it was not comprehensible to the gas station attendant by whom he judged these things.

I guess that it's remembered as the malaise speech, because when it was backgrounded, especially by Pat Caddell, he used that word.

And it's also remembered because it not only described malaise, but sadly created one.

ZAKARIA: Did it...

JOHN O'SULLIVAN, RADIO FREE EUROPE/RADIO LIBERTY AND SPEECHWRITER FOR MARGARET THATCHER: It was saturated in the feeling of malaise, that speech. I've read the speech quite recently. And the fact is, it is a -- it's a call to repentance almost.

HERTZBERG: It is. It is.

O'SULLIVAN: And therefore, when people heard the word "malaise" and it was attached to the speech, it seemed reasonably attached, if you know what I mean -- umbilically attached.


HERTZBERG: It was a kind of Calvinist sermon.


HERTZBERG: You know. And it was part of -- in many ways, Carter was more -- was an almost papal, a religious kind of a president.

And he -- I think the speech diagnosed an ill correctly. But when a president diagnoses an ill, he has to offer a solution.

And that was the problem with the speech. It was not what it said, it was what the administration was unable to do.

ZAKARIA: Don't we have that problem now, which is that Obama has to talk about the fact that things are going badly economically. But he has to also not sound like it's doom...

BUCHANAN: Oh, he won't. Well, that was the problem with Carter, and why Reagan was such a dramatic contrast, that buoyant optimism of Reagan contrasting with how bad things are, and it's all our fault.

I think that -- I think that Obama ought to have a Kennedy style. In other words, crossing -- he has crossed the river. Eisenhower was a fine president, but he's behind us. And Reagan -- I mean, excuse me, Kennedy -- looked forward. That's what I would expect from Obama, would be where we're going, how we are getting out of this mess we are in. Maybe some of FDR, or something like that. Buoyancy, uplifting, and it's going to take some hard work and travail, but we're going to get through this.

ZAKARIA: Don't dwell on the mess, in other words.

NOONAN: Yes. A break with history.


BUCHANAN: Exactly, exactly. A break.

NOONAN: Kick away from that old history.

HERTZBERG: But no smiley-face optimism.

I mean, one thing -- that's kind of gone out of style. That's not believable anymore. Just...

BUCHANAN: I think that's right.

HERTZBERG: ... this sort of puffy optimism. It's not -- he won't offer that. It'll be somber.

Just like -- there was a hint of it in the speech he gave the night he was elected...


HERTZBERG: ... which was also -- it was not a triumphant, you know, a big victory speech. It was a somber speech.

NOONAN: Yes, his tone was somber.

I would add that, when presidents can be thoughtful and even almost down, or speak of things that are painful, if they haven't been president for a while -- when a president has been president for a while and says, "Things are very bad," everybody goes, "Yeah, well, you son-of-a-gun, you've been president for two years."


If, however, you are brand new, not responsible for the mess, you have a lot of freedom. And you can -- you have a lot of freedom of tone, but a lot of freedom of what you can say and where you can go.

O'SULLIVAN: Also, you can be optimistic in a different way. I mean, I think the most optimistic speech in the English language begins with the words, "I have nothing to offer you but blood, toil, tears and sweat."

But that's -- that was the description of the situation Britain was in at the time when Churchill delivered that speech. But he went on to say, we're going on to ultimate victory. It was because he said the first that he was able to credibly say the second. And I think that Obama is in this position this week.

NOONAN: We can do it. That's what's so important. We can do it.

ZAKARIA: Now we have a bit of a contest here between the two of you as to which is the worst speech a president has ever made. You think, Pat, and you say in your new book, that it was the "Axis of Evil" speech.

BUCHANAN: I don't know that it's such a terrible speech, but it was the most disastrous speech I know that a president has delivered.


GEORGE W. BUSH, 43RD PRESIDENT OF THE UNITED STATES: North Korea has a regime arming with missiles and weapons of mass destruction. Iran aggressively pursues these weapons and exports terror. Iraq continues to flaunt its hostility toward America and to support terror.

States like these, and their terrorist allies, constitute an Axis of Evil, arming to threaten the peace of the world.


BUCHANAN: He had the whole country united behind him after the victory, the swift victory in Afghanistan. And then to stand up and say, you know, we've got this "Axis of Evil" that's coming after us, he just -- he laid down three markers, sent three ultimatums to three countries with no authority to deal with them.

I thought it shattered his coalition domestically, it shattered it in terms of foreign terms, and I think he proceeded from there down the path, an ideological path that led to his destruction.

I think -- in the fall of 2001 -- I think he was virtually converted to this ideology of we're going to end tyranny in our world, we have to democratize the world or we will never be secure. And he marched right down that road to the end of his presidency.

ZAKARIA: And, Peggy, you think that actually the worst speech of the Bush presidency certainly was?

NOONAN: The worst speech from the president in my lifetime, Bush's second inaugural because he outlawed tyranny in the world.


It was repeated -- he went a bridge too far, because he...

ZAKARIA: But now what was wrong with that?

NOONAN: He said things beyond...

ZAKARIA: It's lofty. It's rhetorical. It's... NOONAN: Oh, come on. You have to be tethered to reality. Do you know what I mean?

We are humans living in a fallen world. We live in real life. We don't live in heaven. Therefore, while it would be lovely if God outlawed tyranny, the American president cannot do that.

So we are aspirational without being delusional. You know, I think that crossed the line.

ZAKARIA: And that's what you meant by the puffy -- too much puffy-faced optimism.

HERTZBERG: Yes. That speech...

ZAKARIA: Because that just sounds untethered to reality.

HERTZBERG: Both those speeches, and especially that Bush second inaugural, were pretty good op-ed columns. They were well-written.


NOONAN: Yes, by think-tanks, not by a president.

HERTZBERG: It was well-written. But as Peggy says, there has to be some relationship to reality.

ZAKARIA: It also exposes you, I think, to an enormous sense of hypocrisy, because, you know, you listen to it, and then the next day the Saudi king is at your ranch, and the day after that you're palling around with Putin.

And people say, "Wait a minute. You were going to end tyranny, and you're consorting with tyrants.

O'SULLIVAN: In fact, the president's aides had to fan out around Washington the following day, saying, the president didn't mean what you think he meant. And they were actually able to point out passages in the speech which were qualifications.

But frankly, that didn't matter, because the over-optimism of the speech was the dominant mood of it.

BUCHANAN: Our policy...

NOONAN: And the big qualification was, we will not launch a war -- we will not resort to arms. When you have to do a qualification that says, by the way, we won't be resorting to arms, you've already gone too far.


BUCHANAN: Well, Wilson was going to make the world safe for democracy, and Bush was going to make the whole world democratic. It was preposterous. It was Wilson on steroids.

ZAKARIA: And we will be back with Peggy Noonan, Rik Hertzberg, Pat Buchanan and John O'Sullivan.


ZAKARIA: And we are back with Peggy Noonan, Rik Hertzberg, Pat Buchanan and John O'Sullivan, talking about speechwriting for the president.

What do you think Obama should do? What should be the sort of goal number one...

BUCHANAN: What you do in an inaugural address -- and Nixon did it -- is you set yourself at the time and place you're at, and you tell people where we are going and how we get there.

Sixty-eight was the most divisive year in this country's history since the Civil War. Nixon's first inaugural identified that, and described how we've got to go forward together. And he tried to reach out to both sides.

1972 -- 1973, excuse me -- by then, you'd had the opening to China, the detente with Russia, the end of the Vietnam War. And he was talking about the structure of peace he had built, and we're going forward. There's not too -- I mean, there's not great, memorable phrases, but that's how you get remembered in a speech.

You have nothing to fear but fear itself in '33. You have John F. Kennedy's ask not what your country can do for you, ask what you can do for your country.

And the greatest of them all -- and Peggy and I agree -- a very brief one, 1965, March, Abraham Lincoln's second inaugural...

ZAKARIA: 1865.

NOONAN: 1865.

BUCHANAN: That's 1865. That is an Old Testament prophet. And you compare that to the first inaugural -- where he's talking about a Thirteenth Amendment, which would make slavery endure forever, then you talk about that second in the final weeks of the Civil War -- it is the most powerful address he delivered. I think it's superior to the Gettysburg Address.

HERTZBERG: I agree with you.

NOONAN: The only moment of genius in all of the inaugural addresses was that moment. And Lincoln's second, as they call it.

ZAKARIA: And, Peggy, what was it about Lincoln? Lincoln was deeply influenced by both the Bible, by Shakespeare -- and yet, his own American colloquial style.

NOONAN: It was not so colloquial. It was...

ZAKARIA: But the address was... NOONAN: It was formal. It was language that was spare, uncluttered, direct, but Biblical in that it packed a serious punch in terms of meaning, saying -- bringing God into this equation in a very big way -- and saying, look, this Civil War...

BUCHANAN: I was at the March on Washington. I was up there in the Lincoln Memorial...

ZAKARIA: I thought you were about to tell me you were at Lincoln's second inaugural.



NOONAN: He would have been...

BUCHANAN: But that was 1960s, 1963. And the cadences, the southern cadences and the Biblical references, and the "speaking to our creed." He was calling white America to live up to the creed of your own Bible. It was enormously powerful and moving, and I think you touched on it with Lincoln.

He steeps it in the creed of the country and the beliefs and the religious beliefs of the country. I think that's what makes it so powerful and compelling.

NOONAN: And sternfully (ph).

O'SULLIVAN: But surely this is very relevant to the speech we're going to hear next week, because Obama sees himself as, in some respects, an heir to Lincoln.

He identifies with Lincoln. They're both from Illinois. And he is someone who has enormous respect for Lincoln.

And he must see -- because, after all we all see -- that just as Lincoln was a giant step towards a more equal and just America, so Obama's election is, so to speak, the achievement of that to a considerable extent.

So, whatever he says, his simple existence at that podium will be a statement similar to Lincoln's address.

NOONAN: Yes...

O'SULLIVAN: He cannot possibly be as eloquent as Lincoln. But I would expect him to be eloquent and to touch on these themes, the Lincoln themes.

ZAKARIA: Why is...

NOONAN: Could I?

ZAKARIA: Yes, please.

NOONAN: Could I add briefly?

An important part of Obama's self-perception is writer. That is how he sees himself. It's how he organizes the world. It's how he takes in data and absorbs it and organizes it, and comes up with views and decisions.

That makes this more interesting. This is a writer's inaugural address.

ZAKARIA: You wrote speeches for a British prime minister.


ZAKARIA: There is no equivalent, really. There is no moment where a British prime minister has to give this kind of lofty address, is there?

O'SULLIVAN: There is no moment. I would say the nearest equivalent is this, and for this reason. The president is a monarch as well the party leader. Therefore, he gives a speech which addresses the whole nation.

In Britain, the queen is the monarch. The prime minister, however well-regarded, is the leader of a party and a partisan political figure.

So, I'm afraid the nearest to an inaugural address is the speech to the annual party conference. And they are speeches which prime ministers take as seriously as presidents do their inaugural.

When I was working with Mrs. Thatcher, we would begin a party conference speech. We'd give her the first draft on the weekend before the party conference. We'd spend the entire weekend working with her on it.

And then we'd all go to Blackpool, where three or four of us would sit around while she was at the convention, rewriting and rewriting, as she came back with new suggestions and ideas.

So, yes, it was a party political event. It was a different character of speech. But it was a speech in which I think the prime minister always feels this is a speech by which I live or die in the nation's mind for the next 12 months.

BUCHANAN: With Nixon, let me say that -- with Nixon, I would go in and you would write like the Cambodian invasion speech. You would come in to him and he would give you, "Kissinger sent me this. This isn't worth a hoot," and this and that, and give you all of this, dictate 12 pages of notes and say, "Get back in two hours with a draft."

And then you'd get back in two hours. And he'd go through it again, go through it again and again. And after you went through eight or nine drafts, you said, "I don't recognize a word of this. It is all Nixon."

And he was that way. It was all him when he got to the end of a speech.

With the inaugural though, Ray Price was the principal writer on the inaugural. And his inaugurals reflect an awful lot of Price, I think the sort of -- much more the abstract phraseology and things like that.

Nixon always wanted you to -- one quick story. I came out of his office one day and I'd written something and handed it in. He said, you know, "Get some lift into this thing, Buchanan."

And I was going out of the office, and he said to me, "Why can't my writers write like Wilson?" You know?

And as I left -- I didn't say it to him -- when I come out, when the door closed, I said, "Wilson wrote his own speeches."

NOONAN: Oh! Take that!


ZAKARIA: Rik, let me ask you quickly. It was either you or James Fallows who said being Jimmy Carter's speechwriter was being like FDR's tap-dance instructor...

HERTZBERG: That was Jim, yes.


ZAKARIA: What was it like writing for Carter?

HERTZBERG: Well, you know, there are two kinds of speechwriting -- presidential speechwriting and all the rest. And it is always, I think, gratifying to write for a president, because everybody pays attention, whether the speech or the person deserves it or not.

So it was exhilarating to write for Jimmy Carter, believe it or not. And it was despairing.

You know, the thing about White House service is the ups are very, very, very high, and the lows are very, very low.


ZAKARIA: Peggy, you pointed out, this is a writer who is going to be writing his inaugural, who is the president. Does that make a big difference, do you think, in terms of the way in which he is going to try and construct this inaugural, the way he's going to think about his speeches in general?

NOONAN: Obama's rise has come with one thing, not party machinations, not coming from city machinations, not this, not that.

He has been a man who has, through words, attempted to capture a moment, speak of its meaning, and speak of what is needed. He is man of words. And that, to me, is one of the things that makes this inaugural so potentially interesting. With some political figures whom we've all known, the speech was not central. The speech was a weary thing one had to do, part of the showbiz and politics.

HERTZBERG: Obama is a real writer, as Peggy says. And he, unlike, I think any president in American history, with the possible exception of Lincoln, he is a literary writer. You know, you read that memoir of his, "Dreams from My Father." It's beautifully paced. It's fully of literary devices and literary merit.

And I think that's a big difference between this guy and the next.

ZAKARIA: And we will be back with Peggy Noonan, Rik Hertzberg, Pat Buchanan and John O'Sullivan.


ZAKARIA: So, what's the goal that -- you know, if there were one line that comes out of this for Obama, what would you want -- you know, if you were writing it for him -- what would be the line that people should remember?

You know, all these speeches always have one theme or one line you remember.

NOONAN: Let me give you just one thought. It has been many months -- it's been about a year since people felt they had a president, if you will. There's been a certain void as the current president's popularity has gone down, and he had to deal with that fact strategically.

All right. They have a new president now.

But it's been some time since the American people heard, we've got an economic problem, but, baby, we are getting through it. We are going to get past this thing. We are going to rise again. We are going to grow again. We are Americans. Don't bet against us.

That's how I'd be thinking.

BUCHANAN: I think we're -- you say that, look, we're in tough times and it's going to get a lot tougher. But we're going to see this through, and we're going to rise up to far greater heights than we've seen before.

But be somber and straightforward, and say it's going to involve sacrifice, and it's going to take time. But we're going to see this through, because we're starting out on a brand new course for America.

HERTZBERG: Things are pretty dire, but we are now, as of now, taking control of our own destiny again.

O'SULLIVAN: If an America that was a slaveholding society 150 years ago can elect a black president, I'm certain it can overcome any difficulties that history puts in its way in future, including those around us now.


ZAKARIA: All right. If you hear any of these lines, you know that they are copyrighted on this show.


Peggy Noonan, Pat Buchanan, Rik Hertzberg, John O'Sullivan, thank you very much.

We will be back.


ZAKARIA: As Barack Obama prepares to take office, he has no bigger challenge than fixing the economy.

On this program, I've talked to many esteemed economists, but few with keener insights than the Harvard historian, Niall Ferguson.

I spoke with Niall recently about the crisis, and also his fascinating new book with its grand title, "The Ascent of Money: A Financial History of the World."


ZAKARIA: Welcome, Niall Ferguson.

Niall, when you look at the history of financial times, troubles, how bad is the one we're currently in?

NIALL FERGUSON, HARVARD UNIVERSITY AND AUTHOR, "THE ASCENT OF MONEY": We are now in a financial crisis that bears comparison with the Great Depression. Nobody should have any doubt about that.

The difference is that we're adopting very different monetary and fiscal policies to try to repress that crisis. That's why I would call it a Great Repression.

But it is potentially as bad. We're not out of the woods yet. And it seems to me that we're looking not only at the biggest post-war recession, but potentially also at an extremely slow, long, lost decade. It's something that nobody ...

ZAKARIA: Sort of like Japan in the '90s.

FERGUSON: That could be a good scenario. If you think of the Great Depression as the worst case scenario, we would be getting off lightly if we can get by with a decade of one percent per annum growth.

So at the moment, I'm really quite apprehensive that the process of deleveraging has far from run its course. There's no floor in sight in the real estate market. And these things have a self-perpetuating quality. One of the lessons of history is that depressions tend to feed on themselves. There is, after all, a psychological dimension to this. Once people get really spooked, it's very hard for the market to find its bottom.

And remember, stocks sold off between '29 and '33 by nearly 87 percent. So you have to have a sense of orders of magnitude here.

Financial crises happen infrequently on this kind of scale. And that's why we need to have historical knowledge to have an understanding of their dynamics.

ZAKARIA: If you want to look at the nightmare scenario, the Japanese people forget -- initially pretended they had no problem in the 1990s.

But two or three years into their crisis, they injected capital into the banks, they cut interest rates and they had massive fiscal stimulus -- all the things that we're doing. And it didn't work.

FERGUSON: The most you can say is that they avoided a Great Depression. I mean, they ended up with very low, almost zero growth for a decade.

But, you know, that's a better scenario than what happened in the 1930s. Let's not forget that in the 1930s, the United States -- and, for that matter, Germany -- saw unemployment of 25 percent of the civilian work force. And output contracted by roughly a third, by roughly 30 percent.

So, if you compare a depression with a stagnation, you're going to take the stagnation every time. That's why I say, paradoxically, the Japanese scenario of a lost decade might be a good outcome compared with the Great Depression 2.0 scenario.

ZAKARIA: But the difference this time around is, there are other countries out there that are growing. What does that mean, that China and India will probably have some reasonable growth rates despite all this?

FERGUSON: Well, that's the hope. But I'm not 100 percent convinced that this is going to work out.

Notice also that the stock markets of countries like China -- not to mention India, Russia and Brazil, the BRICs -- well, they're dropping like bricks right now, with sell-offs far in excess of what we've seen in the United States.

So, I think there's a question mark over whether China and these other rapidly industrializing countries can keep the world going. They're still much smaller economies than the United States.

If the U.S. consumer goes on strike, then I don't really see how the BRICs are going to substitute. They're nowhere near big enough, and their consumers are nowhere near rich enough. ZAKARIA: But wouldn't you say that, in this scenario which you're describing, which is very scary, the mistake would be to err on the side of caution? And, therefore, wouldn't it make sense to have a very, very large stimulus program of some kind?

FERGUSON: What worries me, Fareed, is that each country is going about this in its own way, in an almost uncoordinated way, despite the G-20 summit in Washington.

It's as if everybody is dusting down their copy of Keynes' "General Theory" and embarking on a national stimulus package, just in the same way that each central bank is heading towards a zero percent interest rate, but at its own pace.

The thing that worries me is that we seem to be forgetting how globally integrated the world economy now is. Each national action has an international reaction, an international consequence. And...

ZAKARIA: Such as? Play that out.

Suppose we had a $1.5 trillion deficit. You are suggesting there's a problem, because somebody has to buy this debt.


Well, we've been confidently assuming that the rest of the world will continue to make its savings available to finance our current account deficit, which isn't about to disappear overnight.

Even if it's only a large federal deficit, a large government deficit, the money has to come from somewhere. And $1.5 trillion is serious money in anybody's book. I mean, this is somewhere close to 10 percent of U.S. GDP.

Now, the savings are out there in the surplus countries right now. But if the Chinese decide they'd rather deploy their resources into growing their own consumption, I don't see how they can simultaneously buy a trillion dollars of freshly printed 10-year Treasuries.

ZAKARIA: So what happens? Suppose we start running these deficits, the Chinese don't want to buy U.S. debt. Our interest rates have to start going up dramatically.

FERGUSON: Oh, we could see a sell-off, exactly, in the bond market. The price of U.S. bonds could go down. We could then, therefore, see the yields go up. And suddenly, you're looking not at a 3.5 percent rate on the 10-year, but something much higher.

The other problem is, of course, in the currency markets. We're assuming that the dollar will be the international reserve currency for the rest of time. But that's no way a historical lesson.

It seems to be clear from the experience of the British currency that reserve currencies are not forever. They're not like diamonds. And at some point, questions are going to be asked about how far the American currency really is the most reliable currency.

ZAKARIA: What is the back story of what is going on now?

When people look back 50 years, 100 years from now, and they watch the United States in this extraordinarily vulnerable position because of all this debt -- somewhat true of Western Europe as well, perhaps in some ways more true -- and they watch China, with $2 trillion of surplus savings, with a budget surplus, growing still, for the most part, robustly, what will they say about the trajectory of these countries?

FERGUSON: I think they'll look back and say, you know what? There was actually one country at the heart of the global economy in the early 21st century, and it was called Chimerica -- China plus America. And these two economies were symbiotically linked. They were intertwined with one another.

China did the saving, America did the spending. China made its funds available through currency intervention, the United States took the money and piled on the debt.

And this worked pretty well for nearly a decade. It took us from the Asian crisis of '97, '98, right down to the American crisis that began in 2007.

The question that historians will grapple with -- and this is the thing that fascinates me now -- is whether or not Chimerica was able to survive this crisis. If China and America continue to interact economically, then it seems to me we're in with quite a good chance of avoiding another Great Depression.

So the Chinese ...

ZAKARIA: In a sense you mean, the Chinese have to save America in this crisis.

FERGUSON: Well, somebody has to finance all of this borrowing. And somebody has to make sure that there are still markets for Asian exports.

There is a reasonable argument for saying that the Chinese will continue to buy 10-year Treasuries and other dollar-denominated securities in order to maintain the global trade that goes on between China and the rest of the world.

But there is an alternative that they can choose. They can say market socialism in one country. We're going to focus on our resources, our own consumption. We're going to say good-bye to the world market and revert to being a rather introverted Middle Kingdom.

It's happened before in history. It wouldn't be the first time.

Now, if that happens, it's the end of globalization. If Chimerica turns out, if you'll forgive the pun, to be a chimera, then we really do risk being taken back to something like the 1930s. Because remember, the key to the Depression wasn't just the banking crisis or the stock market crash in the United States. It was the breakdown of globalization as a result of protectionism and a collapse of international trade.

That's what made the Depression so protracted and so deep.

And my worry is that we could inadvertently allow the same kind of thing to happen if there isn't adequate coordination between Washington and between Beijing. That's the key relationship that future historians will talk about.

ZAKARIA: All right. We'll be back with some good news, maybe, with Niall Ferguson.


ZAKARIA: And we are back with Niall Ferguson of Harvard University, and the author of "The Ascent of Money."

Niall, take us through the past and shed some light on the present. So, right now we have this kind of financial collapse of confidence. Credit has dried up.

When has that happened before? And does it always have a serious impact on the economy?

FERGUSON: Well, I think it's worth cheering ourselves up with the reflection that, in the very, very long run, financial history is a good news story. It's a success story.

That's why I called the book "The Ascent of Money." It hasn't just ascended to be the dominant subject of conversation in this country. It's also ascended from extraordinary, simple beginnings to produce a system that integrates the world economy and facilitates all kinds of transactions.

It's been a bumpy ride, though, because as you say, this isn't the first major crisis that we've experienced.

You know, you can go right back to the early history of banking, go right back to the Italian city states of the Medieval and Renaissance period, and it's striking how often financial crises came along and blew banks up back then. The immediate predecessors of the hugely successful Medici Bank went bust when, among others, the English king defaulted on his debts.

So, financial history has a kind of familiar, repetitive quality to it.

ZAKARIA: Now, in those days, am I right in thinking -- I mean, really back over most of it -- the big crises were often because governments, kings, bankrupted themselves by overspending because of wars?


ZAKARIA: We are now overspending because of, in effect, citizens and consumers who over-consume. Is that...

FERGUSON: Most debt throughout history in fact is public debt until relatively recently. It was governments that could borrow on a really large scale, and ordinary citizens simply didn't have the collateral to do that. I mean, consumer credit is really a 20th century phenomenon.

The only people who could put on substantial amounts of leverage before that were the aristocrats who had large estates and were effectively mini-monarchs.

ZAKARIA: And did they? Were there aristocrats and financiers that did the kind of thing that hedge funds do today?

FERGUSON: Oh, absolutely. I mean, the Duke of Buckingham is a particularly fine example of a 19th century tale of disaster in the leveraged real estate market.

The second Duke of Buckingham was a pretty high-living kind of character, who lived life to the full. And there was nothing that he wasn't prepared to throw money at, from mistresses and other men's wives, to the most extravagant furnishings that have ever been seen.

And I paid a visit to Stowe House, which was once the grandest private residence in all of England. It's now a rather forlorn accommodation for a minor public school. But back then, this was a symbol of aristocratic living.

The trouble is, it was all financed by debt. Buckingham put on, in many ways, the mother of all mortgages. And there came a point in the 1840s with declining revenues from his agricultural estates, when the creditors called time.

And there was an absolutely humiliating scene when the entire contents of Stowe House were auctioned to the public. The Economist, the magazine which observed these sorts of things very closely, commented that this was a sign of a fundamental shift in the social order, to have a duke's private possessions auctioned off because he'd gone bust.

You see, real estate can get you into trouble even if you have a hereditary title.

ZAKARIA: Now, are we going to look back on these times in that way? In other words, have the last 20 years been a kind of high point of finance and finance capitalism, and perhaps over the next 30 or 40 years we won't see anything like this again, with hedge fund managers making $1 billion a year and birthday parties that cost $3 and $4 million?

FERGUSON: Well, think of it in terms of a planet -- Planet Finance that grew to be even larger than Planet Earth -- when we had the notional amounts outstanding of derivatives by the end of 2006 somewhere in the region of $500 trillion, you know, more than 10 times the annual output of the entire world economy. Or think of it as an era -- the Age of Leverage, a period in which it was easy for households and banks to borrow ever more money, until finally we maxed out.

And I think one of the lessons of history is that it doesn't matter what form your debt takes, whether it's public debt or private debt, whether your government has run up an enormous amount of external borrowing, or whether your households have taken on mortgages that they simply can't service.

Sooner or later financial history tells us these debts have to go one way or the other. They can go through default. They can simply be canceled.

That happened, incidentally, in ancient times. It was called a jubilee. The debts got canceled, and it was pretty hard luck on the creditors when it happened.

The other way that they can be reduced is through inflation. And this has been a recurrent feature, as I try and show in "The Ascent of Money," of financial history -- times when suddenly the value of money itself collapses and, therefore, so too does the value of debts denominated in that money.

That happened to Germany twice in the 20th century. And we shouldn't rule out the possibility that, at some point in this sequence of events, we get ourselves out of this intractable debt problem by letting the printing presses roll and letting the money supply finally generate an inflation in double digits or even treble digits.

ZAKARIA: All right. Give us a last thought that's good news.

You say, in the end, at the end of the day, this is a good news story, and that's why you call it "The Ascent of Money."

So what's the good news here?

FERGUSON: The core, the heartbeat of economic growth, if you like, is innovation -- technological innovation, managerial innovation and financial innovation.

And one of the fascinating things that struck me as I worked on the 1930s and the 1970s, and looked even further back to the first great depression that struck in the late 19th century, when prices fell for more than two decades, is the fact that innovation can keep going even in the toughest times.

Even in the 1930s, American corporations were still making major advances in technology. This was a time when IBM was laying the foundations for the computer, a time when RCA was transforming broadcasting. This was a time of great innovation. General Electric was in its heyday.

In the same way, in the 1970s stagflation, new companies were formed. Microsoft was one of them, Apple was another.

Necessity, Fareed, is the mother of invention. And even in the toughest crisis, I have confidence that in the United States there will be innovators who set, as it were, the path for the next era of economic expansion.

And in that sense, we'll see the ascent of money resume. And we'll look back and say, well, we fell off a cliff then. But we picked ourselves up, and we climbed up the next mountain.

ZAKARIA: Niall Ferguson, always a pleasure.

FERGUSON: Thank you very much.


ZAKARIA: And we'll be back.


ZAKARIA: Looking ahead to next week, there are countless things that need the new president's urgent attention. The economic crisis, the war in the Middle East, our wars in Iraq and Afghanistan, closing Guantanamo -- the list goes on.

Obama should take his first step with one eye on history, because what a president tackles first, or what is foisted upon him first, can set a tone for the rest of the presidency.

Look at two recent examples.


JIMMY CARTER, 39TH PRESIDENT OF THE UNITED STATES: I, Jimmy Carter, do solemnly swear...


ZAKARIA: Less than 24 hours after taking that oath of office, in his first major move as president, Jimmy Carter signed an executive order granting amnesty to thousands of Vietnam War draft dodgers. It was a campaign promise that he was making good on.

But the move inflamed passions and garnered criticism. Senator Barry Goldwater called it the most disgraceful thing a president has ever done.

Now, Carter was just trying to make a statement and to show he was a man of his word. But it backfired on him badly. This first act made him look soft -- in this case, soft on what many saw as criminals and traitors.

And "soft" was a label that followed his presidency -- soft on Iran, soft in reacting to the nation's economic, energy crisis. And soft is not the word you want to describe your presidency.


BILL CLINTON, 42ND PRESIDENT OF THE UNITED STATES: I, William Jefferson Clinton, do solemnly swear...


ZAKARIA: Bill Clinton had a campaign promise he wanted to keep, as well -- about gays in the military. He didn't intend to act on it quickly, but the Republican opposition forced his hand. And just eight days after the Arkansas governor became president, he went to war with the Pentagon.


CLINTON: The issue is not whether there should be homosexuals in the military. Everyone concedes that there are.


ZAKARIA: Military leaders were already wary of Clinton, who had been dogged during the campaign by allegations of being a draft- dodger. And now, the new commander-in-chief was taking them on directly.


CLINTON: The issue is whether men and women who can and have served with real distinction should be excluded from military service, solely on the basis of their status. And I believe they should not.


ZAKARIA: In my opinion, Clinton was right. But that didn't matter. The eventual compromise came, and it was called "don't ask, don't tell." And it pleased no one. One side thought it went too far, the other thought it didn't go far enough.

The Obama team has said that the president-elect intends to get "don't ask, don't tell" overturned. Good. But they have been very careful to say that it will not be one of the first items they tackle.

And now, before I go, my question of the week.

We've talked a lot today about presidential speeches. What I want to know is, what particular line from history inspired you? Spoken by a president or a prime minister or a king, what quotation have you found most powerful in your life?

E-mail and let me know your thoughts.

Also, I'd like to recommend a book by Peggy Noonan, the "Wall Street Journal" columnist and speechwriter who was on the program earlier. It's called "What I Saw at the Revolution." It's about her years writing for and working with Ronald Reagan. It came out in 2003, but it's still a terrific read. And as always, don't forget to check out our Web site,, for highlights from this program, our weekly podcast and some conversations that are exclusive to the Web site. You can also e-mail me at

Thank you. Have a great week.