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Fareed Zakaria GPS

Pakistani Government Achieves Truce With Taliban

Aired March 01, 2009 - 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.

There was important news last week out of Pakistan. And we've talked a lot about this issue on GPS. The Pakistani government announced a truce with the Taliban, allowing it to set up Islamic courts in the country's Swat Valley.

Reports now abound that girls will no longer be allowed to go to school, that brutal beatings are taking place for minor infractions -- the list goes on.

These are bad guys, and this is bad news.

But the real question is: What can we, from the outside, do about it?

There is a rising tide of radical Islam in some parts of the world -- in Afghanistan, Pakistan, Somalia, Nigeria. And it has complex causes -- the breakdown of order, the opening up of the political system to new forces, the corruption of the existing regimes.

But it's not clear that using Western military force, Predator bombings, is solving this problem. Perhaps we need to start making a distinction between the bad guys who want to keep women out of schools and the bad guys who want to kill us.

Many members of the Taliban fit into that former category. They are radicals, fundamentalists. They want Islamic law in their country. But they are not trying to wage a global jihad.

We should fight these fundamentalists, but with ideas, education, politics -- not with Predators. Those should be reserved for the much smaller band of jihadis, who seek to kill us. Otherwise, we're going to find ourselves at war around the world with a collection of varied groups that have varying goals.

Anyway, those are my provisional thoughts on the subject. To educate myself -- and I hope, all of you -- we're going to have a conversation about all this right now.

Then, some fascinating insights into a zombie economy from the prime minister of Canada, who is an economist, and also with a brilliant financial journalist. (BEGIN VIDEO CLIP)

MARTIN WOLF, "FINANCIAL TIMES": This is a very serious problem we're now in. We are in a major, massive, global downturn with a real prospect of getting out of hand. Everything is going very badly. The shrinkage of world output is terrifying.


ZAKARIA: Stay with us.


ZAKARIA: Let's start talking about radical Islam.

Joining me are Bernard-Henri Levy, who wrote, among several great works, "Who Killed Daniel Pearl?"

Asra Nomani is the author of "Standing Alone: An American Woman's Struggle for the Soul of Islam."

Fawaz Gerges' most recent book is "Journey of the Jihadist: Inside Muslim Militancy."

And Christopher Hitchens wrote "God Is Not Great: How Religion Poisons Everything," among many, many other books.

Bernard, the problem of radical Islam presents itself very dramatically in the last two weeks in Pakistan. The Pakistani government has signed this deal in Swat with the Taliban.

Is this a capitulation to the forces of Islamism? Or is it a kind of recognition of reality, and perhaps the hope for some political stability?

BERNARD-HENRI LEVY, AUTHOR, "WHO KILLED DANIEL PEARL?": The real distinction to make -- the real one -- is between religion and politics.

As for myself, I have nothing against religious faith, nothing against a Muslim, even fundamentalist, as long as his faith remains between himself and himself, even a fundamentalist. I can agree, I can speak with a fundamentalist reader of the Quran.

But when it comes to say that Quran should be the rule to create a society, when it comes to say that the treatment of women, of foreigners (ph) and the rule of a country depends on the Quran, then it is a political question, and then we have to defend the civil society against...


LEVY: ... Taliban or al Qaeda, it is the same.

It is a political movement which must be qualified as fascist. And the question is to know if democracies have to oppose fascism or not. If we think that we don't have to oppose, fascism, it's a point of view.


LEVY: It's not mine.

GERGES: Let me -- the question -- the first question is, what are the differences between the Taliban on the one hand, and the global jihadists on the other? And that's the first.

And the second question, what do we want? What do we do, we as the Western world? That is, what's our goal?

LEVY: Promote, defend democracy.

GERGES: The first question is, Fareed, al Qaeda is waging a global jihad, all-out war, against the United States and its allies, be it -- I mean, Western powers -- close Western powers, and Middle Eastern states,

The Taliban, regardless, will come back to what -- the Taliban is not interested in waging a global jihad along the same lines as the global jihadists, al Qaeda, point one.

The Taliban have been on record saying their goal, regardless -- I agree, I fully agree, the Taliban is a bloody, regressive -- I'm not going to go into in the fascist state...

LEVY: All right. A system of fascist...

GERGES: ... historical analogies, reactionary...


GERGES: ... regressive -- I mean, whatever.

But the Taliban is not interested in waging global jihad. This particular struggle, Fareed, in Afghanistan and Pakistan, must be won, must be won by Pakistani and Afghani progressively (ph), with our help.

What could we do instead of waging war? Because our war, Fareed, as you suggested earlier, has played directly into the hands of the Taliban.


ZAKARIA: Let me ask you a question. There isn't a single member of the Taliban who has been found involved in any global terrorist...

GERGES: Never.

ZAKARIA: ... right? So, why are we at war with them? Not why should we oppose them, but why are we at war with them?

CHRISTOPHER HITCHENS, AUTHOR, "GOD IS NOT GREAT": I just wanted to say to Fawaz that I have a different memory than his from -- my memory differs from his, I should say -- about the relationship -- symbiotic, I would call it -- between the Taliban and al Qaeda.

It could be that this vote on the shura council did take place. But when the Taliban were offered by President Bush, we will leave you alone if you give up your horrible guest and his henchmen, they refused. They said, we're going to fight you.

GERGES: And Mullah Omar, again, Mullah Omar...


ZAKARIA: But the point is that no Afghan...

HITCHENS: A man who we missed the chance to kill, and who is now going around blinding and burning women.

GERGES: We're not disagreeing...

ZAKARIA: All true. All true. But there isn't a single Afghan who has been involved in a terrorist attack against the United States, Britain, France, you know, anything outside of the Afghan...


HITCHENS: They simply provided the hinterland for al Qaeda. They meant that...


HITCHENS: ... al Qaeda a state at its disposal. We can't...


HITCHENS: I think we have the right to say, we will make the life of any government that shelters these people unlivable, unbearable. And it doesn't matter if it makes us unpopular. We just -- we've raised that cost to the point where no rogue or failed or potentially rogue or failed state can take it.


HITCHENS: We have the right to do that.

LEVY: There is not only attacks on America, there is also attacks on little girls, on women, on the democrats in Afghanistan itself...

HITCHENS: Yes, on India...


LEVY: ... Talibans commit every day. Attacks against civilians in their country.

Lashkar-e-Toiba, Lashkar et (ph) Gens (ph) Vie (ph), Jaish-e- Mohammed -- these groups which were responsible, for example, on the attack on Bombay -- are they al Qaeda or are they Taliban? They are both of them.

There is an indistinct frontier. There is a symbiosis between the two. You cannot separate...

ZAKARIA: But isn't this, Bernard, like saying, you know, all these communists and socialists were the same during the Cold War? Wasn't it important to actually make...

GERGES: It's a monolith. Absolutely there are distinctions.

ZAKARIA: ... distinctions...


ZAKARIA: ... between Stalin and Tito, between Stalin and Mao?

LEVY: Fareed, when you have the cult of blood, when you have the cult of violence...

ZAKARIA: Stalin and Mao both had the cult of blood.

LEVY: ... when you hate the women, when you hate the Jews, and when you hate the democratic values...


ZAKARIA: But Bernard, but one is trying to kill us and the other may not.


LEVY: The difference between the two is global. The word "global" makes the difference.

I mean that Talibans as themselves probably will not have committed the September 11 bloodbath. Sure. But...

ZAKARIA: Or any other...


LEVY: Or any other foreign attack. So, the difference is global.

But should we be concerned only when an anti-democratic movement becomes global?


ZAKARIA: But that's not -- my question to you is, should we go to war? Should we drop bombs on people who are doing despicable things to women in Afghanistan? Is that a cause to go to war with them?

GERGES: And then also, the question is, could it be, could it be just for a second, that a war in Afghanistan and Pakistan, producing the opposite results from the intended consequence?

We have to discuss this, point one. Point two...


ASRA NOMANI, AUTHOR, "STANDING ALONE IN MECCA": I mean, military strategy may not be the solution, but there is undoubtedly a conflict that we have to resolve. I mean, this is something that the Obama administration must tackle differently than we had -- or solutions in the Bush administration.

It may just be a matter of time before the Afghanistan Taliban extend their reach. I mean, the truth is that they have been enmeshed with each other. The jihadi groups in Pakistan have been working closely with the Taliban groups. And al Qaeda has been immersed in that.

The Daniel Pearl case is a perfect example of how jihadi groups in Pakistan perhaps intersected with some of these larger elements with global dreams.

And so I think it's...

GERGES: Yes, of course.

NOMANI: ... completely, you know, short-sighted if we don't...


HITCHENS: Fawaz has a very central question. I would riposte this. I mean, it was said in Iraq until very recently, that the harder we fight in Iraq, the more we bring jihadists into the country, the more it becomes their place, that what we've created is the equal and opposite effect to the one we hoped to create. Nonsense. Nonsense.

ZAKARIA: But the biggest...


ZAKARIA: But Christopher, to be fair...

HITCHENS: We inflicted -- we inflicted the battlefield with (UNINTELLIGIBLE) al Qaeda...

ZAKARIA: The most important thing we did in Iraq was we started talking to the jihadists, who had been killing us. We made a distinction in Iraq between Sunni jihadists...

GERGES: Absolutely, the Sunni insurgency...

ZAKARIA: ... and the al Qaeda...


ZAKARIA: ... on the one hand saying, these guys are nasty, they're bad. But they -- and they were actually killing us. But we said, but they are not inherently, in their nature, you know, all about global jihad.

GERGES: And that's how the war was turned around.

ZAKARIA: And we could separate them.

HITCHENS: Well, look. I'm not...

ZAKARIA: Isn't that very much...

HITCHENS: ... splitting these groups or trying to turn them at all.

I'm saying that I don't want the distinction between them to be made too absolute. And I don't like the argument that the counterstroke is our fault. It was just bad generalship.

I mean, we worked out ways of inflicting not just a battlefield defeat on al Qaeda in Iraq, but a political defeat as well. They have been humiliated and discredited in front of, so to say, their own people.

ZAKARIA: But mainly because...

GERGES: Absolutely.

ZAKARIA: ... because we took the Sunni community, 90 percent -- as Petraeus' adviser, Kilcullen, says -- we talked to 90 percent of the jihadists, and isolated 10 percent.

GERGES: Two integral points...

HITCHENS: And killed (ph) (UNINTELLIGIBLE), right, precisely.

GERGES: Can I add two integral points?

The war in Iraq, Christopher, has been turned around as a result of we making distinctions between the Sunni-based insurgency and the global jihadists. This is -- we have not won the war against al Qaeda in Iraq. The Sunni community has chased al Qaeda out of Iraq.

ZAKARIA: All right. We've got to take a break. We will be right back.


GERGES: Al Qaeda has lost the war, Fareed, for Arab minds, if not hearts.



ZAKARIA: And we're back, talking about radical Islam with Bernard-Henri Levy, Fawaz Gerges, Asra Nomani and Christopher Hitchens.

You know, the big question on the table is, can we live with radical Islam? Not, can we approve of it. Not, can we celebrate it. But can we accept that it exists in some parts of the world?

In Nigeria there will be places which have Sharia, maybe there are towns in Pakistan, maybe there are places in Afghanistan. Can we accept that and wait for a political, cultural, educational struggle that will overwhelm it -- the forces of modernity to overwhelm it -- or do we have to kind of fight these forces?

GERGES: I mean, I think one of the major premises is that it is counterproductive and empirically false to equate the global jihadists of al Qaeda and its affiliates with various Islamically-based groups, point one.

And point two, we're also suggesting it's counterproductive for our own interests. We, we're talking about the United States of America.

I fully agree with you, it's a local struggle that must be won locally. And the question is, what could we do as an international community...

NOMANI: I think it's a global struggle (ph).

GERGES: ... to help -- look. Instead of basically bombing areas -- even the -- I mean, how many of us know that Pakistan authorities basically denounce America's attacks, yet at the same -- American flights are...


LEVY: Is Darfur genocide a local problem?

GERGES: Yes, absolutely. No, not at all.



NOMANI: I don't agree that it's a local problem.

GERGES: Darfur is not a local problem.


LEVY: What do you mean by local or global?

GERGES: No, no, no. I'm saying...

LEVY: I don't know. You know...

GERGES: But is -- the question...

LEVY: In the '30s, when the Spanish fascists took power, was it local or was it global? It was both. When you are in front of these sorts of forces, denying the liberties, hating the democracy, the distinction between local and global

GERGES: Absolutely.

LEVY: ... does not (UNINTELLIGIBLE) order (ph).

GERGES: I fully agree. And I'm suggesting we, the international community, I'm sorry, we have a major stake in how this struggle evolves. All I'm suggesting, that the strategy of militarism, throwing military might at it, is not the way to go.

I'm not suggesting that we should not, individually and collectively as an international community, truly play an active role.

LEVY: In Pakistan...

GERGES: It basically...

LEVY: In Pakistan we have one thing to do. We have to -- you are, America -- and Europe, a little -- channeling huge amounts of money to the regime. This should be submitted to conditions.

GERGES: Absolutely.

LEVY: To political conditions.

GERGES: You're absolutely correct, yes.

LEVY: What are you doing with your secret services?

GERGES: Yes, yes.

LEVY: What are you doing with your Muslim fundamentalist clerics?

ZAKARIA: I have a feeling we...

LEVY: If we could achieve to formulate a real political analysis and political treatment of all of that, we would make a real progress.


LEVY: It is not religious. It is political.

NOMANI: We don't offer a political solution for those that interpret the Quran in a different way than the jihadists who wish to wage war on the world. This is what I think is the ultimate loss, the ultimate defeat in Pakistan, for example, with what's happening in Swat Valley, what's happening in the frontier areas, in all of the tribal areas.

Because those moderates that exist there, that don't interpret the Quran as saying that we must kill the West and the "non-believer," quote-unquote, they are frightened. They are insecure. They are under siege. And this has a ripple effect through the world then, because, ultimately, into communities in America you have that same sense of intimidation, that same theological intimidation.

And that is why, to me, I see the enemy in this situation as a common one, because I feel like their theological basis is common, and their enemy is common.

HITCHENS: There has been a very long cultural struggle going on, as you know, for many years, going to al-Azhar, the rest (ph), other centers of Muslim learning and authority and scholarship saying, can we get a ruling from you, a fatwa, that suicide bombing is not Islamic, that those who do this are betraying it? And they can't.

They won't do it. Why is this?

GERGES: I'm really...

HITCHENS: There's something aggressive about the theocracy -- the theology and the theocracy.

GERGES: I'm really shocked by how theoretically detached the discussion from what's happening in the region.

I mean, in the last seven years, Fareed -- and really I am pleasantly surprised how al Qaeda has generated a major debate in the Muslim world about questions of jihad, about questions of violence, about questions of liberalism, the question of women.

In fact, for all of you, and I don't know if you know, al Qaeda faces a massive crisis of authority and legitimacy in the Muslim world. Al Qaeda has lost the war, Fareed, for Arab minds, if not hearts.

In fact, in the Muslim world, Christopher, now, the top leading clerics that we follow on a daily basis are really trying to construct, craft a different interpretation of jihad based on the moral, similar to what we have just for theory in Judaism and Christianity.

There is now a major attack by the top clerics in the Muslim world, who are trying to basically -- because al Qaeda has tried to hijack the whole notion of jihad.

ZAKARIA: And isn't it true that many of them have actually issued fatwas against suicide bombing?

GERGES: Absolutely. In fact in fact, al-Azhar, Christopher, Tantawi, is being attacked on a weekly basis -- the Sheikh Tantawi, who is the head...

ZAKARIA: Who is the head of al-Azhar, which is...

GERGES: ... who has been on record day after day, not only against al Qaeda, but against all kinds of violence, politically-based violence. NOMANI: Yes, but with all due respect...

GERGES: And this is what we need -- when we talk about the Muslim world, we need to make distinctions...

NOMANI: But we're not making...


ZAKARIA: But, Fawaz, let me ask a question to you, because, I mean, I see the same thing you're describing. I see al Qaeda on the defensive. I see many of these moderate clerics, so-called, who are denouncing it and denouncing suicide bombing.

But then I look at Somalia, where an Islamist group takes over a town every few months, Nigeria, where 10 states have adopted Sharia law, parts of Pakistan and Afghanistan.

So, I'm confused. Is it on the retreat? Or does it have remarkable resilience?

LEVY: It's a battle. It's a war.

You know, the terrible formula, clash of civilization, invented by Huntington -- the only real clash of civilization today, the only serious one, is inside Islam between the moderates and the fascists.

This is a clash...

NOMANI: And I would argue...

LEVY: ... between the moderate civilization and the fascist civilization inside the Muslim world...


LEVY: Who is winning? Who is winning? Who is under retreat? I don't know. I hope that the moderates are on the progress (ph), and I hope that the fascists are retreating. I am not sure.

GERGES: We're not disagreeing then, that there is -- the conflict is really within...


LEVY: But we have a responsibility to help as much...

GERGES: Not by waging -- I mean, wars and by...


LEVY: I don't say that war is never the best solution. Sometimes it is the only one which remains.

GERGES: Turmoil basically helps the extremists versus the moderates. LEVY: It depends...


GERGES: War basically...


ZAKARIA: Asra, what have you been reading?

NOMANI: Our formula for war has made us give up Swat Valley, though. I mean, this -- Swat Valley does not represent one of your examples of progress.

GERGES: No, it does not, it does not.

NOMANI: So it really...


GERGES: ... question asked about other theaters, as well. We're talking...

NOMANI: Right. But it belies this idea that extremist al Qaeda ideology is losing in our Muslim world. And this is the truth.

I mean, we're not talking theory here. This is on-the-ground in a region that has never been in the grips of this extremist ideology.

ZAKARIA: And that concludes this discussion. We will have to talk about it again. There will be other occasions. Thank you all.

We'll be right back.


MARTIN WOLF, "FINANCIAL TIMES": Everything is going very badly. The shrinkage of world output is terrifying.



ZAKARIA: It was a week of superlatives -- a historically high budget, a record-breaking deficit, new lows for home sales, new highs for unemployment.

In short, another terribly depressing set of economic news this week -- not just in the United States, but around the world.

I thought long and hard about whom I wanted to talk to about all of this, and there's nobody who knows more than Martin Wolf.

Martin is the chief economics commentator at the "Financial Times." His column is an absolute must-read.

Welcome back, Martin.


ZAKARIA: I've been reading your columns over the last few weeks, and I've been struck by the fact that you've been very critical of the Obama team and their plan.

Explain in a nutshell, what's the problem?

WOLF: Well, first of all, I think we have to recognize this is a very serious problem we're now in. We are in a major, massive global downturn with a real prospect of getting out of hand.

Everything is going very badly. The shrinkage of world output is terrifying. And I think this is an event which can only now be compared with the '30s.

Everything has turned out worse than anybody expected, even the most pessimistic people a year ago. It's important to remember how much worse it is now than even the most pessimistic, like my friend Nouriel Roubini, thought it would be now.

Against that background, we -- I suppose this may have been a fond expectation -- hope that the new team -- very intelligent people, completely free from the taint of the past -- would take hold of the situation and take action so decisive, so comprehensive, so ruthless, that it was clear that, on the worst case scenario, it was going to be turned around.

I think all the segments they've dealt with, the three things they've dealt with -- the stimulus, the financial package, the home situation -- they're the right segments.

But in every case, the policy has been far too cautious, far too politically constrained. And it's not going to shift expectations. And that's absolutely obvious it's what the markets have concluded, and it's what the world's concluded.

And I fear now, that this tremendously important opportunity to turn things around has been lost. And that means we may have a really dreadful situation in the world economy -- and the whole world, therefore, politically, as well -- over the next few years.

So, I think they failed to seize the initiative.

ZAKARIA: All right. Let's start with the stimulus.

The economic stimulus plan, $900 billion. Obama's gotten a lot of criticism from the right, that it's full of pork and things.

But your criticisms are different. Explain exactly what your problem is.

WOLF: Well, the problem with the stimulus package, in my view, is essentially twofold. First, surprisingly, it's too small. I know $900 billion -- or $800 billion -- sounds like a lot of money. But this is a $14 trillion economy. And the private sector is in freefall, in my view.

And that's because the private sector stopped spending, simply, around the world.

ZAKARIA: People and companies have stopped spending.

WOLF: People and companies have just stopped spending.

ZAKARIA: So, the government has to...

WOLF: And so, the government has to spend.

We are in that very rare situation, in my view -- it occurs in the West perhaps once every 70 years. It's a situation described by the famous English economist, John Maynard Keynes. It's a situation of deficient demand.

So, the government must spend. And it must spend in very large quantities.

So, I think, actually, on my calculations, you wanted a stimulus of six or seven percent of GDP, at least -- in the first year. Not...

ZAKARIA: Which is -- explain what that is in layman's (ph) terms (ph)?

WOLF: That would mean about the sums we're talking about. Seven hundred billion dollars or so should be spent at once.

ZAKARIA: In the first year.

WOLF: In the first year.

ZAKARIA: And in fact...

WOLF: Now.

ZAKARIA: ... only $200 billion will be spent...

WOLF: That's right. Now. We want it spent now.

A year from now, in the year -- it could be too late.

ZAKARIA: But you know what? A lot of Obama people say, when you say that is, they didn't have what they call shovel-ready projects. There wasn't -- you couldn't find things to spend on.

You don't -- you're not restricted to just so-called shovel-ready projects. You're not restricted to investment at all. You can just send people checks. And if it's not large enough, send them more.

Even if they save some, that's not so terrible, because you want people to reduce their debt. The crucial thing is, this is a situation in which you need to get money out into the public, to people who will spend. And that can be done, I have no doubt about it, just by borrowing money from the Federal Reserve and sending it.

The trouble is, if everybody decides not to spend in a country where 72 percent of demand was consumption, you know -- and this was a big...

ZAKARIA: (UNINTELLIGIBLE) 72 (ph) percent of the economy...

WOLF: ... the economy was American consumer demand, and they all decide, "Actually, we don't want to spend so much. We want to consume only, perhaps 10 percent less than this," then, of course, you've got very weak demand, and there's nothing in the world, really, to offset this.

The statistic I like to point out, if you look at the world level, is American household spending, consumption, was twice as much -- twice as much -- as the total GDP of China and India together.

This is really a big part of the world economy.

ZAKARIA: So, explain to an average person watching, what is their life -- what is the life of an average family going to look like? If what you're describing as, you know, a bleak outcome, but a quite likely outcome, a year or two into this, what is their life going to look like?

WOLF: What I'm really imagining here is a world in which over- indebted people are trying to pay down their debt. The level of debt in the household sector -- among households in the United States -- has doubled relative to their incomes in the last 10 years or so.

So they spend a lot of time saving. They don't go to the mall. They live more cheaply.

Obviously, we're assuming here they have a job. A lot of people will be without jobs. Certainly, more of them will be without good, well-paying jobs in this situation, for a long period. So they're going to be more frugal.

And I think at the aggregate level, the result is that the sort of huge consumption binge we saw -- I mean, U.S. households were spending more than their incomes for years and years and years, and borrowing and borrowing. That will all be over.


WOLF: And that's what happened in a different way, of course, in Japan.

ZAKARIA: And it means their 401(k)s, their retirement accounts have been -- have dropped in value, so they retire later.

WOLF: Yes. ZAKARIA: It means that...

WOLF: They're poorer.

ZAKARIA: ... no more raises, because companies aren't doing well enough.

WOLF: They're poorer than they thought they were.

I mean, part of that was -- I'm not predicting the stock market, because the stock market can move everywhere, on anywhere.

But, yes. And house prices are certainly not going back to the peaks that we saw two or three years ago, maybe for a generation.

Their wealth loss is trillions and trillions of dollars. So -- and that's true around the world. Around the world, the loss in equity value is about $40 trillion around the world. So, these are monstrous figures.

Now, in this situation, of course, it's inevitable. People are cutting back, so there was no big consumption driver.

Corporations aren't going to go out and invest when they've got no demand. And they can't borrow from the banks, either. We haven't discussed the failure to fix the banks.

So, for all these reasons, you know, for the private sector, it's not at all obvious where the demand will come from.

And meanwhile, as I said, I think the government stimulus here is not too bad, here and around the world. It's just too little.

So, I fear a long period of stagnation, and with a lot of bad news coming out -- very bad economically and very bad politically, and very depressing.

ZAKARIA: Martin, stay right here. After the break, what might be even scarier than what you've already heard -- Martin's opinion of the Obama administration's bank bailout. It isn't good.


ZAKARIA: And we are back with Martin Wolf, the columnist for the "Financial Times," talking about the Obama plan.

Let's talk about the other part of this package, the Obama team's package, which is the bank bailout.

You had been advocating a bank bailout for a long time. The Obama team comes in -- fresh team, smart people, you know them all. And as far as you're concerned, they lay an egg.

WOLF: Yes. I don't really understand -- but I am here in very good company -- what exactly they're trying to do. There is a big debate about how insolvent the banking system is. But I think many people whom I trust would say that, if you understood what's going to happen to the value of the banking sector's assets, the claims they have on the rest of the economy, you look at where we are now, it's going to get worse and worse. So that they are almost certainly grossly undercapitalized -- the big banks -- if not insolvent.

And that's clearly what the market thinks.

ZAKARIA: So, what should Obama do?

WOLF: In this situation -- let's first understand the danger. The danger is, it won't lend. And worse, they're all trying to reduce their loan book. And that will make the economic situation much worse. So, you need soundly capitalized banks.

Now, if that's the case, there are essentially only two ways of doing this. One -- which is quite wrongly called nationalization -- is restructuring under a sort of bankruptcy procedure, which is exactly what the FDIC, the Federal Deposit Insurance Company (sic) does.

ZAKARIA: And the FDIC does this with small banks...

WOLF: Yes.

ZAKARIA: ... every -- is doing this...

WOLF: Yes, yes...

ZAKARIA: ... with small banks every week.

WOLF: Yes.

Now, obviously, the big institutions, it's much more complex. I understand that. And, of course, they're incredibly big and important institutions. So, you have to do it quickly and ruthlessly.

And it is possible that this is where they will end up when they do their so-called stress testing. But nobody's quite clear whether that's what they want to do. And some of the suggestions we've heard from the Federal Reserve chairman, Mr. Bernanke, suggest they're very unwilling to do something so radical.

Now, the alternative thing to do -- which is, I concede, politically very difficult -- is just to put in a vast quantity of public capital. In a sense, they're sort of dripping it in in very small quantities.

But if, of course, the public sector does put in most of the capital -- that means the taxpayer is bearing most of the risk -- it seems completely unreasonable to say this is a private business.

But the crucial point about it is this. The country cannot prosper if its biggest banks are not seen as being utterly sound, utterly solid institutions, which are capable of coping with the crises that will come. Otherwise you have so-called zombie banks.

We saw that in Japan. Zombie banks won't lend, can't lend. They can't write off bad debt, so they keep on -- because they don't have enough capital -- so they keep on relending to bad debtors. They can't start lending to good new customers, and you basically get a frozen economy.

And that is part of the story. I think that a lot of this is that they're not prepared to say -- the people who invested in the banks and the bank management themselves -- the game is over, it's going to have to change.

ZAKARIA: You have to fire the management...

WOLF: It has to be new. These are -- you know, they're incredibly concerned to keep private sector management of these banks. I think that's rather (ph) reasonable. We want private banks, and are utterly against nationalized banks.

But these banks, and these bankers? I mean, with a few exceptions, well, you know, they made the mistakes that got us here.

ZAKARIA: The mortgage proposal, the third part of the Obama plan. What do you think of that?

WOLF: Well, as I understand this -- it's not something I've looked at quite so closely -- the essence of it is to try and reduce, as it were, the cash flow burden for households, lowering interest rates.


ZAKARIA: So, you lower the interest rate, so that the monthly payment that an average household has is less.

WOLF: Even though they have a house which is worth less than their mortgage.

Now, I don't know whether that will work. My own view is that the collapse in housing values here is permanent. It's a long-term loss. That was a huge bubble. We're not going to see those prices again.

So, there are a great many mortgages which are under water. There'll be people -- and they will remain under water.

I think it's very...

ZAKARIA: No matter what you do with that...

WOLF: What you do. And there's nothing you can do about it, because I actually think house prices need to fall. They have to fall to clear -- houses have to become cheap, so people will start buying them again and you've got a normal market. And that's going to have to continue, I think, for a little bit longer while prices get really cheap. So, in this situation, what I worry about is that, actually, this won't solve the problem. It's a bankruptcy situation. And in a bankruptcy situation, you have to reconstruct the debt. In fact, you have to lower the debt below the value of the property.

Now, whether that is very important to do this through a foreclosure process or through -- by keeping people in their homes, that's a sort of big social decision. And you can take that either way.

But it seems to me, the fundamental point to recognize is, there are bankruptcies. And in bankruptcies, it's just like the banking issue. There are real losses. And these losses have to be borne by somebody.

And that means, in some way or other, either the government bears them -- the taxpayer at large -- or the creditors bear them.

ZAKARIA: What grade do you give the Obama team?

WOLF: Well, they're certainly better than the predecessor in terms of dealing with this. And they're much smarter, and they have got all the right subjects and right topics.

But in terms of -- well, I would say probably a B.

ZAKARIA: And you're an English grader, so I'm guessing B would translate in America as a D.

WOLF: I don't know. It's not a very high grade.

And basically, it's disappointment, because I think these are incredibly smart people. They understand the problem. And they had a unique, wonderful opportunity to transform everybody's views of what the U.S. is capable of.

And the U.S., as always, is the only place that can fix this problem, which is now a major global crisis.

ZAKARIA: Martin Wolf, thank you. Very sobering.

And we will be right back.


STEPHEN HARPER, PRIME MINISTER OF CANADA: My own judgment, Fareed, is, quite frankly, we are not going to ever defeat the insurgency.



ZAKARIA: Here is a question for you. Which country, alone in the industrialized world, has not had a single bank failure, not even a bank bailout? The answer? Canada.

What are they doing that we are not?

The prime minister of Canada is my guest today, and we'll ask him that question in a moment.

But first, I wanted to ask him about another important topic -- Afghanistan.

Canada has been fighting alongside the United States from the start, and in some of the toughest places in the country.

But does the prime minister think this war can be won?

Prime Minister Stephen Harper, welcome.


ZAKARIA: A national security question.


ZAKARIA: If President Obama asks you, as part of a rethinking of policy in Afghanistan, for either a larger Canadian contingent or a continuation of the existing Canadian contingent in Afghanistan, would you be willing to provide him with that?

HARPER: If President Obama were to ask me that question, I would have a question back for him. And that question would be: What is your plan to leave Afghanistan to the Afghans, so they can govern it?

Because there are enormous risks there for us and enormous challenges. And I'm not saying we cannot improve things. But if we think -- our experience has taught us, if we think that we are going to govern Afghanistan for the Afghans, or over the long term be responsible for day-to-day security in Afghanistan, and see that country improve, we are mistaken.

And so, if -- I welcome President Obama's renewed commitment to Afghanistan, the fact that they're sending a lot more American troops. We're delighted to have them, especially in Kandahar, where we need the partner.

But over the long haul, if President Obama wants anybody to do more, I would ask very hard questions about what is the strategy for success and for an eventual departure?

ZAKARIA: But it sounds like there is very little support in Canada for an extension of Canada's mission, which expires in 2012, am I right?

HARPER: Yes. It expires at the end of 2011.

The issue in Canada, Fareed, I don't think is whether we stay or whether we go. The issue that Canadians ask is, are we being successful? And...

ZAKARIA: What's your answer to that right now?

HARPER: Right now, we have made gains. Those gains are not irreversible, so the success has been modest.

ZAKARIA: So then, why leave?

HARPER: We're not going to win this war just by staying. We're not going to -- in fact, my own judgment, Fareed, is, quite frankly, we are not going to ever defeat the insurgency. Afghanistan has probably had -- my reading of Afghanistan history, it's probably had an insurgency forever, of some kind.

What has to happen in Afghanistan is, we have to have an Afghan government that is capable of managing that insurgency and improving its own governance.

ZAKARIA: So, we are never going to defeat the insurgency. The best we can do is train Afghan forces that can take it on, and then we withdraw.

HARPER: Absolutely. Because I think, you know, a part of the calculation there is the fact that, ultimately, the source of authority in Afghanistan has to be perceived as being indigenous.

If it's perceived as being foreign -- and I still think we're welcome there -- but if it's perceived as being foreign, it will always have a significant degree of opposition.

ZAKARIA: Is it your sense that Karzai's government has legitimacy and should be backed? What do your people tell you?

HARPER: There is no doubt that governance in Afghanistan has to improve, and has to improve much more quickly than what we've seen in the first -- how many years is it now -- almost eight years.

ZAKARIA: Now let's move on to the secrets of Canada's success, its economy.

To me, the most hopeful lesson of the Canadian experience is, you don't actually need to reinvent capitalism or come up with some vastly different alternative, that what you needed was some pretty commonsense, prudential regulation that act as kind of shock absorbers, so that the financial system doesn't go through a kind of rollercoaster ride.

HARPER: No, you don't need to reinvent it. And I guess -- I'll be frank, Fareed. Part of my frustration with the current situation is, you know, we've known from the past -- I mean, we knew from the 1920s -- that an unregulated, completely unregulated financial sector would lead to -- would lead to pyramid selling and all kinds of equivalent problems.

So, in a sense, you know, we're going back and relearning some lessons that I thought had already been learned. ZAKARIA: You talked about the fact that your fiscal stimulus package has within it reductions of tariffs...

HARPER: Right.

ZAKARIA: ... as opposed to many other fiscal stimulus packages around the world, which are actually, in some ways, subsidies for various industries, or even raise tariffs.

Did that come up in your discussions with President Obama last week?

HARPER: Yes, absolutely. I had a good visit with President Obama. And obviously, one of the big concerns we have in Canada is not to see the U.S. slide towards protectionism.

You know, we need the global economy to recover. It is a global economy.

If we try and make this economy recover by having a series of stimulus packages that are oriented towards stimulating only a national economy, or a national economy at the expense of a global economy, we're actually going to drive this thing deeper into recession.

And President Obama certainly gave me the assurances I needed to hear. Now, obviously, we'll watch as we move forward.

As you know, it's...

ZAKARIA: But he gave you an assurance that, despite what he said on the campaign trail, no renegotiation of NAFTA?

HARPER: What President Obama said to me is -- said to us -- is basically, look. We're not looking to reopen NAFTA, but we have labor and environmental side agreements. We think those should be better integrated into the main body of NAFTA.

ZAKARIA: And some Canadians have suggested that, if it were to be renegotiated, well, you guys have concerns, as well.

HARPER: Oh, yes. Sure. Look, if it were to be renegotiated, Canada, as you know, is the largest energy importer for the United States.

ZAKARIA: In other words, you sell us most of our oil.

HARPER: Yes, we sell -- we sell more energy products to the United States than the United States buys from any other country -- by a long shot.

And we're not just talking oil. We're talking hydroelectricity, uranium -- you name it.

Obviously, we would have a great deal of leverage there that we probably didn't have 20 years ago. ZAKARIA: You're an economist. What should we do to get out of this mess?

HARPER: I happen to believe that fiscal stimulus measures right now are essential. I'm not generally a Keynesian. But when you have the kind of drops in economic activity we're having, and interest rates near zero, and financial sectors and the banking sector not translating investments into saving -- or savings into investment -- you have no choice but to have the government move in, absorb those funds and put them to work.

Now, one can criticize, is it fast enough, is it effective, are the long-run benefits sufficient. But I think the fiscal stimulus does have to be done. And obviously, there's going to have to be major, non-market fixes to the financial sector and to the housing sector.

We're just fortunate in Canada, we don't have to do those kinds of policies, because they're fraught with enormous long-run danger in terms of creating moral hazard risks to future economic decisions.

But we haven't had to do that. As you said, we don't have a bank failure in Canada. And we don't have, on the housing side -- we have also regulation on government housing insurance that's prevented subprime type of situation.

We have a cyclical downturn, but nothing that requires major government intervention.

ZAKARIA: Prime Minister Harper, thank you very much.

HARPER: Thanks, Fareed.

ZAKARIA: And we will be back.


ZAKARIA: As our regular viewers know, at this point each week I ask you my question. And today I want to warn you, it's a tough one.

Just a few minutes ago on this program, Canadian Prime Minister Stephen Harper said something I thought was fascinating -- and also scary.

Listen again to this one statement.


HARPER: My own judgment, Fareed, is, quite frankly, we are not going to ever defeat the insurgency.


ZAKARIA: The insurgency he's talking about are the Taliban -- the people we are fighting in Afghanistan.

If Prime Minister Harper's statement is true, then what is the United States doing in Afghanistan, and what should it do?

That is my question. I want to hear what you think. I realize that this is a question that can't be answered in one sentence. But if you can, try to keep your answer to a couple of sentences. I'll read the best ones next week.

Now, last week I asked you: Where should Secretary of State Hillary Clinton go on her second trip abroad?

The majority of you said the Middle East. And though she is attending a conference in Egypt tomorrow, it has not yet been billed as a state visit. So, she's sort of taking your advice.

Also, I'd like to recommend a book. The title is "John Maynard Keynes: Economist, Philosopher, Statesman," by Robert Skidelsky -- one volume. It is, of course, a biography.

Since we talk a lot about the economy on this program, I thought you should read this. John Maynard Keynes' name comes up very often, and I realize not everyone will be familiar with him and his work.

When we discuss the economic stimulus, or the basic idea of spending more government money to speed up the economy, to get it out of a recession, that was originally Keynes' idea.

But this book is not economics. It's not homework. It's a great book, good writing. It's a biography told by a storyteller.

As always, don't forget to check out our Web site,, for highlights from this program and our weekly podcast. And you can also e-mail me at

Thank you for watching. Have a great week.