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Fareed Zakaria GPS

Iran's Power Struggle; Iranian Election Fallout; French Economy and Reforms

Aired July 26, 2009 - 13:00   ET

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

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.

We have a wonderful show today. Nouriel Roubini, Niall Ferguson and Mortimer Zuckerman tell us whether the recession is over. The most powerful woman in France, Christine Lagarde, brings a European perspective to all this.

But first, Iran. This was a week marked by no big events, protests, explosions. But there's much stirring beneath the surface.

The most striking aspect is an opposition movement that refuses to be silenced. Ali Akbar Rafsanjani -- the former president, currently head of an important constitutional body -- has called for the release of all those in prison for political reasons. That, by the way, would include the friend of this program, the respected Newsweek reporter, Maziar Bahari, who is in jail.

Then, Mohammad Khatami, another two-term president, called for a referendum on the country's leaders. Meanwhile, the supreme leader, Ali Khamenei, and the country's president, Mahmoud Ahmadinejad, are battling over an appointment.

Finally, Mir Hossein Mousavi, the candidate who might actually have won the June presidential elections, has announced that he is going to create a large-scale social movement to oppose the government.

What does all this mean? It's very hard to say from the outside. But clearly, there is a bitter contestation for power taking place in Tehran. The stakes are very high.

It does not appear that the regime has lost any of its grip on the repressive backbone of its power -- the military, the Revolutionary Guard and the paramilitary, the Basij.

But the theocratic facade is clearly cracking. That's why Ahmadinejad can dare defy the supreme leader. In fact, a leading Iranian paper allied with the opposition now refers to Khamenei as merely "the leader" of Iran, having dropped the prefix, "supreme."

This might seem like a small sign. But imagine if one day Vatican newspapers stopped calling the pope "His Holiness."

We'll speak about all of this to our guest from Tehran, a prominent Iranian academic often seen as allied with the regime. It's been very difficult to speak with anyone on the ground inside Iran, so this is a rare opportunity.

Let's get started.

(BREAK)

ZAKARIA: Joining me now from Tehran is Seyed Mohammad Marandi. He is a professor of North American Studies at Tehran University.

Professor Marandi, welcome.

PROF. SEYED MOHAMMAD MARANDI, UNIVERSITY OF TEHRAN: Thank you.

ZAKARIA: Let me ask you, professor, how do we make sense of what is going on in Iran right now? The only way in which the regime has been able to maintain its control is to use fairly tough methods -- brutal methods -- of repression.

It has used the Basij. It is using the Revolutionary Guard. It is arresting people. It is arresting journalists.

This is not what the Islamic Republic of Iran presents to the world as the basis of its regime. It is turning into a military dictatorship, is it not?

MARANDI: Since Mr. Mousavi's people went to the streets day after day, it was causing trouble in the city of Tehran. So, the police really felt that they had to bring thing back to normal.

Mr. Mousavi took people to the streets in the heart of Tehran, where businesses were severely disrupted and damaged, ordinary people were hurt. And he did it on a daily basis.

And on the other hand, I think that Mr. Ahmadinejad was provocative in his victory speech after the election.

But I think that, as things settle down and the two sides become more level-headed and less emotional, the supporters of both gentlemen, I think things will return back to normal.

ZAKARIA: But they are not normal. Mr. Mousavi's brother-in-law is in jail. Many of his supporters are in jail. He is under effective house arrest.

You're making this out like a normal dispute at election, where people are now happily reconciled. But you still have, on one side, the use of the Basij, the Revolutionary Guard, house arrests, real arrests.

This is, as I say, this has become a military clampdown and a military dictatorship, has it not?

MARANDI: No, again, I don't agree, because if you go on the streets of Tehran, things are very normal. I mean, you can walk around town... ZAKARIA: You can walk around...

MARANDI: ... and you will not see anything extraordinary.

ZAKARIA: You can walk around North Korea, as well, Professor Marandi.

MARANDI: I think you also have to keep in mind the fact that some of the measures taken by the security forces have to do with the fact that there has been a lot of interference from outside the country.

Right now you have almost 40 television channels in Persian being broadcast into Iran from the United States and Europe -- basically funded by the American government and European governments, or in some cases owned -- which have played a very negative role over the past few weeks, turning people against one another.

This sort of behavior and this sort of funding coming from the United States and its European allies really does not serve their interests.

ZAKARIA: Professor Marandi, you can't possibly expect us to believe that. Here you have a two-term president of Iran, Rafsanjani, calling for opposition to the regime; a two-term prime minister of Iran, Mr. Mousavi, calling for the creation of an opposition movement; a two-term president, Khatami, calling for a referendum.

You have people under house arrest. You have major clerics in Qom asking that Ahmadinejad's election be boycotted.

Are you telling me all these people are doing this at the bidding of the United States? Surely you must realize that that's kind of a ludicrous claim.

MARANDI: Well, that's not exactly what I said.

What I was saying was that the path that the United States...

ZAKARIA: Those are the people who are asking people to go out on the streets -- not President Obama. It is a president alright. It just happens to be President Khatami and Rafsanjani, not President Obama.

MARANDI: What I've been saying was that, when external forces and governments outside of Iran interfere in a country's internal affairs, it only makes matters worse, and it only creates further tensions.

I think it's extraordinary that the United States allows itself to beam in tens of television channels, or fund television channels that beam into the country. And in many cases, they call for riots, and they call for violence.

ZAKARIA: Do you worry that you will be seen in history as a mouthpiece for a dying, repressive regime in its death throes? That 20 years from now you'll look back, and the world will look back at you, the way it did some of those smooth-talking, English-speaking, Soviet spokesmen who were telling us right in the middle 1980s, that the Soviet Union was all just fine and democratic and wonderful?

MARANDI: Well, Fareed, I am an academic at the University of Tehran. And I would be very surprised to know that Mr. Ahmadinejad would be supportive of me, because I have always been a critic of his administration. But I think it is my duty to be honest.

And if he has won the election, I will have to accept the results. Just like when Mr. Hugo Chavez wins elections in Venezuela, I think the people who oppose him have to accept the results.

And also, I think that, if we look back in my own personal history, I was a volunteer in the Iraq-Iran War when Iraq invaded Iran. And I survived two chemical attacks by the Iraqi regime.

And those chemical weapons were provided to Iraq's -- to Saddam Hussein -- by the European Union countries and the United States. They provided...

ZAKARIA: You know that that's not true.

MARANDI: ... (UNINTELLIGIBLE) technology.

ZAKARIA: And you..

MARANDI: And I think that if...

ZAKARIA: You hesitated there, Professor Marandi, because you know it is not true that the United States provided any...

MARANDI: But the technology and the support...

ZAKARIA: You're trying to come up with some way to formulate it that you...

MARANDI: No, the United States did provide Saddam Hussein with support.

ZAKARIA: With agricultural credits. They did not provide them with chemical weapons.

MARANDI: Come on, Fareed. You know that the United States did back Saddam -- you know that the United States did back Saddam Hussein, that they supported him both directly...

ZAKARIA: I may -- I said very clearly it provided agricultural credits. Though that's not chemical weapons. These are two separate things.

MARANDI: Well, I think history has shown that the United States did back Saddam Hussein at a time when he was carrying out brutal measures against the people -- his own people -- and the people of Iran. And I am a survivor of those two attacks. But at the end of the day, what I am looking for is a more realistic understanding of Iran in the United States, in order for rapprochement to begin.

And if people in the United States, if politicians in the United States do not wish to understand the reality on the ground in Iran, then there will not be an opportunity for the two sides to sit together and to resolve their issues.

ZAKARIA: All right. Thank you very much, Professor Marandi. I will only point out to you and to our viewers, that one sign that the regime looks favorably upon you is it is almost impossible to get anybody from Tehran -- you know, and to be allowed to do so on an open satellite link.

MARANDI: Fareed, you invited me.

ZAKARIA: We have tried very hard -- that's my point. But it is very hard to get these satellite links through in Iran. And the fact that you are allowed to do this...

MARANDI: Well, a lot of people, Fareed, don't trust the Western media.

ZAKARIA: Well, my point stands.

MARANDI: No, Fareed. A lot of people here don't trust the Western media.

ZAKARIA: I would love to...

MARANDI: They think it's biased...

ZAKARIA: I would love to talk to...

MARANDI: ... rightly or wrongly.

ZAKARIA: I would love to talk to Prime Minister Mousavi, President Khatami or President Rafsanjani. But alas, we are not allowed to speak to them.

MARANDI: Well, that's not...

ZAKARIA: The only person we are allowed to speak to is you.

MARANDI: Well again -- but you can speak to my colleagues at the University of Tehran. And you can speak to my students. Hopefully, if you get a visa one of these days, you can come to speak to them...

ZAKARIA: Which I applied for several times and have never gotten. So...

MARANDI: ... and meet them. And you'll see that it's a very different world from the one that you believe it to be.

ZAKARIA: Well, I anxiously await the day I will be granted a visa to Tehran. It has not happened yet.

Thank you very much, Professor Marandi.

MARANDI: But if you think that I am somehow the Mouth of Sauron, I think you're mistaken.

ZAKARIA: Thank you.

(BEGIN VIDEO CLIP)

NIALL FERGUSON: At some point, Americans and foreigners are going to wake up to the fact that the U.S. is on an unsustainable path.

It's clear in the budget that was produced at the beginning of this year that there's no plan to bring the United States' finances under control.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: Are we done with this recession?

Here to tell us we have an economist, a historian and a businessman -- each at the top of his field.

The economist, Nouriel Roubini, is known on Wall Street as "Dr. Doom." So when he said in a speech last week that the economy is likely to recover by the end of the year, stocks actually rose 1 percent in one hour.

The billionaire real estate and publishing mogul, Mortimer Zuckerman, is usually an optimist. But last week he wrote in the "Wall Street Journal" that unemployment and the economy is much worse than you might think. Yikes.

And as for Harvard historian, Niall Ferguson, he has been, in his words, a "moderate doomster," warning on this program just a few weeks ago that the gigantic budget deficits of the United States could eventually have dire consequences.

ZAKARIA: Niall, what should we make of the fact that, with all of this bad news, Goldman Sachs had record profits, J.P. Morgan did pretty well?

NIALL FERGUSON, AUTHOR, "ASCENT OF MONEY": Well, this goes to show that, in the Darwinian world of finance, there are winners as well as losers. And the best-run banks are now in a position to make some serious money, particularly on proprietary trading, which as always been one of Goldman Sachs' strong suits.

ZAKARIA: Which -- just explain to people what that is.

FERGUSON: Which is, in a sense, making trades, making transactions with the firm's own capital. But they're still playing this relatively cautiously. It was interesting to see that a number of other banks -- Morgan Stanley, for example -- had to report much more disappointing losses.

And this reminds us that the banking crisis isn't over. It may be over for Goldman, and it may be over J. P. Morgan. But there's a whole tier of other banks, particularly regional banks, that are still in real difficulty.

And the losses on real estate, particularly in commercial real estate, in fact, lie ahead of us. If you try to map out when those losses are going to peak, it would probably be in early next year.

One can't say that this is over. Yes, there are some green shoots in the stock market. Yes, you'll get good results from some well-run financial institutions. But the systemic problems in the banking system are not over.

ZAKARIA: Now, you own one of the largest commercial real estate portfolios in the world. What is going to happen?

MORT ZUCKERMAN, EDITOR-IN-CHIEF, U.S. NEWS & WORLD REPORT: Well, I do think that that is an area of the economy that is going to be very weak for certain kinds of commercial real estate. The particular companies that are going to be in trouble are those that have -- and buildings -- are those that have financing coming due and can't get refinancing.

That's what is going to cause the crunch. It's not necessarily just in terms of the occupancy. It's in terms of the financial structure.

ZAKARIA: But is it a large?

ZUCKERMAN: It is. It's in literally the hundreds of billions of dollars.

But the one that I think is even worse than commercial real estate -- and not just because I'm in commercial real estate -- is credit cards. There are gigantic numbers of credit cards that are going to go into default. And that is both a business and a consumer thing.

The number of credit cards for business went from five million in the year 2000 to 29 million. That's $300 billion in exposure on that. And they're defaulting at a rate even faster than individuals. But it's in the hundreds of billions, even trillions of dollars.

And if you read the financial reports from the banks, the biggest losses that they were suffering was in their credit obligations. And that, I think, is going to really peak. And that's what's going to put great pressure on the banks.

They know the trouble they have in that category. And that's why they're hoarding their cash and not lending very much, because they have huge losses in commercial real estate and in credit cards that they are looking to, and they know they have to cover that.

So I don't think we're out of the credit crunch either.

ZAKARIA: Nouriel, let me ask you to clarify. I gather you felt that the reports of the end of the recession from you were kind of exaggerated. That was that you didn't quite mean to suggest that you were calling the end of the recession.

NOURIEL ROUBINI, STERN SCHOOL OF BUSINESS, NEW YORK UNIVERSITY: Well, the recession technically might be over by the end of the year. And it will last 24 months -- three times as long and more than six times as deep as the previous two.

But I think that the question that is the most relevant is not whether the recession will be over today or in six months, but rather, whether the recovery is going to be strong or shallow. And in my view, the problems of the economy are such that there will be a very weak recovery. So it's going to feel like a recession, even if we're technically out of a recession.

For example, the unemployment rate is right now 9.5. By year-end it's going to be well above 10 percent. It's going to peak at 11 percent some time next year.

So, even if output were to recover, the job market conditions are going to be awful. The U.S. consumer is shopped out, is saving less, is debt burdened.

So, I see a very weak, anemic recovery with even a risk of a double dip.

ZAKARIA: Now, you say -- I mean, at the end of the day, the jobs numbers are the most important numbers, because it will determine spending patterns. You say that the unemployment picture looks a lot bleaker than people realize.

ZUCKERMAN: Yes. I think it is not just the absolute unemployment, but you have underemployment. And if you add that to unemployment, the total people who are, in a sense, working less or not working at all is 25 million, 16.8 percent.

And I agree with Nouriel completely. This number is going to go up and is going to be in the range of 11 percent next year.

And we've had not just temporary unemployment, you've had companies like General Motors and Chrysler wiping out entire divisions and brands. You've had banks and financial institutions eliminating whole areas of business.

These are jobs that are not coming back, so we're going to have a much slower recovery in terms of the employment going forward. And that's what makes me be worried.

And I think the risk that Nouriel refers to basically is, is there going to be a second dip? And will the political system allow for another stimulus program after having, frankly, such a limited effect on the existing stimulus program, which, in my judgment, was terribly, badly structured to do what it should do, which was to get the money into the economy quickly, because otherwise the economy feeds on itself on the downside.

FERGUSON: Well, we've added a $787 billion stimulus on top of a fiscal crisis that is structural in nature and has very little to do, in fact, with this great recession.

The fundamental problem is that nobody in Congress wants to agree on any measure that is likely to bring the budget into long-term balance.

Republicans are addicted to the idea of tax cuts. Democrats can't wait to spend more public money on new reforms that have nothing to do with combating the crisis, whether it's on health care, or climate change, or you name it.

So, there's a major fiscal crisis building in the United States. It's been building for some time. And that is the biggest threat to any long-term recovery. At some point, Americans and foreigners are going to wake up to the fact the U.S. is on an unsustainable path.

It's clear in the budget that was produced at the beginning of this year that there is no plan to bring the United States' finances under control. And we're going to see a crisis at the level of the states next.

So, this is a real train wreck. And I think it's a cause for grave concern for everybody right now.

ZAKARIA: And we will be back right after this.

(BEGIN VIDEO CLIP)

FERGUSON: If anything is calculated to blow this administration apart and turn Barack Obama into a one-term president, it is a fiscal crisis somewhere in the middle of the administration.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: And we are back with our star-studded panel: Niall Ferguson, Nouriel Roubini and Mortimer Zuckerman.

Let's go back to the issue of the recovery. And it does seem like on one issue you all agree, which is, at the end of the day, if the American consumer doesn't get back into the market, you're going to have a very weak, anemic recovery.

And it feels to me like this is almost a psychological question, which is, when will the American consumer feel that he or she has saved enough to start spending again? As you point out correctly, the savings rate is already up to 6 or 7 percent, depending on how you count it. The historical 30-year average was 8 or 9 percent. In the 1950s it was 14 percent.

So, what are you sensing on the ground that -- you know, why do you feel like they're not going to get back into the market for a while?

ZUCKERMAN: Primarily because they have lost such a huge amount of their net worth. The wealth destruction that has taken place, the evaporation of wealth, has been so large and so quick.

They've lost money on the two main assets on the balance sheet of the average American household -- their homes, which was the largest asset. And if home prices have gone down, say, by 30 percent, and you assume an average mortgage of somewhere around 50 to 60 percent, they've lost anywhere from 60 to 75 percent of their equity in their homes. And the same is true of the 401(k)s.

So, people are just going to save. And that means they're not going to spend.

I don't see how that's going to change until there is a much larger anticipation of growth in the economy. And I don't see that for several years.

FERGUSON: One of the extraordinary things is that, if you look at the developed world as a whole, household wealth in relation to income is down to where it was in 1989. We have lost 20 years of wealth accumulation.

But what we haven't lost is the debt that Americans and other countries piled on in order to keep their living standards growing during the last decade. The debt is not going away. The amount of de-leveraging, of debt reduction, that's happened since this crisis began is remarkably small, maybe two or three percentage points of gross domestic product.

So there's a whole lot more saving that has to be done before anybody is going back to the shopping mall.

ZAKARIA: Nouriel, one of the areas -- you've been prescient on so much of this, I'm going to try and tweak you on one thing. You were very gloomy about the prospects of the emerging market countries being able to withstand the downturn in the United States and Europe, and you were particularly grim on China's prospects.

But over the last year -- over the last six or eight months -- China has seemed to do remarkably well. In fact, if you at look Chinese growth quarter-on-quarter, the last quarter they seem to have grown 16 percent. I mean, that is largely because of this massive government stimulus.

But be that as it may, the Chinese economy, the Indian economy, Indonesia, all seem to be doing a lot better than a lot of people had thought. ROUBINI: Right now, China is recovering. But about two-thirds of emerging market economies are still in a recession.

But you have to give credit to emerging markets the fact that, on one side, their balance sheet was in better shape than advanced economies. They had less budget deficits, less leverage in the houses of the financial system.

And because of that, they've been able to do more of a monetary and a fiscal easing that has been now supportive of economic growth. And that's where we see the recovery of some of these emerging markets like China and India.

However, there is a caveat. The Chinese model of growth, like the one of most of Asia and other emerging markets, is based on export-led growth. Now that the U.S. consumption and imports are falling and our trade deficit is going to shrink, the trade surpluses of China and all of these other emerging markets have to shrink.

So, for these countries to be able to go back to their own potential growth rates, they have to stimulate domestic private demand. For the time being they are stimulating domestic public demand.

ZAKARIA: So the crucial question -- just to make sure people understand -- is, can the Chinese government get its people to spend? Because there's a limit to how much the Chinese government can spend.

What is your sense? Will the Chinese consumer be able to bail out the world economy in the way that the American consumer has for the last, you know, decades?

FERGUSON: You can change from being thrifty to being profligate, but not in a year. I mean, the United States used to be full of thrifty people. Go back 100 years and visitors would marvel at the thrifty habits of the descendents of the Puritans.

It took an awful long time and a bout of high inflation in the '70s to persuade Americans that it was better to get leveraged than to save.

The Chinese are not going to be able to turn ordinary Chinese households into spenders, into shoppers, in a matter of 12 months, which is really all they have.

ZAKARIA: What do you think is going to happen between the Chinese-American relationship, you know, that alliance that you talked about in your last book -- Chimerica -- that we over-consume, they over-save, it sort of all works out?

FERGUSON: Well, as you know, Chimerica is a word I coined before this crisis began, because it seemed to me that the marriage between China and America was the key to the global boom.

And now that that boom is over, I think the marriage is on the rocks. The Chinese have been complaining repeatedly this year, going all the way back to the Davos World Economic Forum in the winter, about the way the United States is behaving.

And they fear that the dollar is going to lose its purchasing power, going to lose its credibility as an international currency. And they worry about that, because one consequence of their export-led strategy was the accumulation of a vast quantity of dollars in their international reserves.

Now, the Chinese are very concerned that the way we're going about our recovery -- printing money like fury -- is ultimately going to pass the buck to them, and the buck will be a devalued, depreciated buck.

So, I think the marriage is on the rocks, because the spendthrift partner is now really in big trouble, and the saving part, the Chinese are saying, you know, it's time we cut those credit cards up. "You've maxed out, darling."

ZAKARIA: Now health care reform.

President Obama says you have to do it. What do you think?

ROUBINI: Well, on one side I believe that providing universal health care might be a worthy goal, but the crucial issue is, first of all, how you pay for it. This is $1.5 trillion additional spending over the next 10 years.

One way to think about financing it is by having an additional tax on the wealthier individuals. You have to ask yourself, what's the distortion of that.

But the key issue with health care is that you have to control costs. We're spending 50 percent more than any advanced economy in the world on a per capita basis on health care. And the quality of output of health that we receive in the United States is much worse than Europe, Japan and other countries.

So, we have to do so much more to control costs. Otherwise -- you know, health care spending is already one-sixth of the economy. It could become even bigger in the next 20 years with the aging of the population. That's what we need to do, control costs.

ZAKARIA: When you look at this, we're the only advanced industrial country that doesn't have universal care. We're the only advanced industrial country that isn't able to rein in costs.

Can't we do something?

FERGUSON: Well, it's highly desirable that something like this be done to cover those who are uninsured.

But I keep remembering that phrase right from the beginning of this administration, that the administration shouldn't let a good crisis go to waste. It shouldn't waste this crisis. It was an opportunity.

But I think the crisis could end up wasting a good administration, because what's happening here is very predictable.

What's going to happen is that the administration is going to propose something, and then Congress is going to decide not to pay for it, because they're going to chip away at any tax increases that are proposed. And it's going to end up being more red ink, making the deficit even larger.

If anything is calculated to blow this administration apart and turn Barack Obama into a one-term president, it is a fiscal crisis somewhere in the middle of the administration. And anything that makes the deficit larger, including health care or any other bill you care to mention, is a risk in that respect.

ZAKARIA: On that cheerful note, have a nice day.

Thank you all, Nouriel Roubini, Niall Ferguson, Mortimer Zuckerman.

And we will be back.

(COMMERCIAL BREAK)

ZAKARIA: Now, for our "What in the World?" segment.

Here's what caught my attention this week. It was the top Republican in the Senate, Mitch McConnell, talking about health care.

(BEGIN VIDEO CLIP)

SEN. MITCH MCCONNELL, R-KENTUCKY: We have quality health care now. Surveys indicate that Americans overwhelmingly like the quality. So, let's focus on access and cost, and not try to scrap the whole system.

If you look at the surveys, and ask the American people what they think, they don't think quality is a problem. They think cost is a problem and access is a problem.

(END VIDEO CLIP)

ZAKARIA: A very interesting point, Senator McConnell, but not exactly right.

There is a Gallup poll that says that only about half of all Americans are confident in their country's health care system.

In fact, in all major advanced industrial countries, people have much more confidence in their medical care than we do -- in France, in Germany, in Britain -- and, yes, even in Canada.

We only do better in public satisfaction than countries like Slovakia, Hungary and Greece.

And all this, despite the fact that America spends more on health care per capita than any other nation -- an astonishing 16 percent of our GDP. And yet, on many key measures of health -- life expectancy, infant mortality and, of course, obesity -- we do much worse than most of the industrialized world.

Let's listen to some more of that interview with Senator McConnell.

(BEGIN VIDEO CLIP)

MCCONNELL: I had a friend of mine in Florida who called up recently and said he'd just lost a friend of his Canada, because the government decided he was too old for a certain kind of procedure. And apparently, he didn't have the money or the ability to get down to the United States for quality health care.

I don't think that's the direction the American people want us to go, David.

(END VIDEO CLIP)

ZAKARIA: I find it very hard to believe that the Republican leader of the Senate is deciding major national policy based on anecdotes from a friend of a friend.

The former health minister of Canada, by the way, called McConnell's claim "absolute nonsense."

And the basis of McConnell's point, that American health care is going to become exactly like Canada's if this legislation comes together and passes, is also untrue.

Look, health care is a complicated problem. I don't pretend there is an easy solution. But it is too important an issue to be decided on the basis of anecdotes, misleading statistics and outright falsehoods.

And we'll be right back.

(BEGIN VIDEO CLIP)

CHRISTINE LAGARDE: You know, France and the United States, it's like an old couple.

ZAKARIA: And what stage are we in now? The marriage counseling stage? Or are we out of it?

LAGARDE: No, no, no.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

ZAKARIA: As the finance minister of France, Christine Lagarde is a powerful voice in the global economic crisis. She's acted decisively and smartly to put French banks under control, and has argued frequently and loudly for world cooperation on strengthening financial regulation.

Even before assuming her current position, Lagarde made history as the first female chairman of the international law firm, Baker & McKenzie. And in 2006, she was ranked the 13th most powerful woman in the world by Forbes Magazine.

Welcome.

Thirteen sounds like an unlucky number.

(LAUGHTER)

It's a pleasure to have you on.

CHRISTINE LAGARDE, FINANCE MINISTER OF FRANCE: Thank you so much, Fareed.

ZAKARIA: Now, how are people in France looking at this crisis? Because at some level, it seems, you know, the popular perception, the French must be very happy. Even though they're doing badly, they must think, "You see these Americans? They were so arrogant. They thought their banks rule the world. And it's turned out to be a house of cards."

So, the French are vindicated in economic misery.

LAGARDE: It's not that bad. It's not that bad.

But one sometimes wonders whether the world has gone French, in a way. And...

ZAKARIA: In what sense?

LAGARDE: We always have advocated that there should be better, more comprehensive and more coordinated regulations. And we are actually pushing that.

We are definitely in favor of both free market economy and capitalism. All we are saying is that there has to be rules. There has to be traffic lights. There has to be gatekeepers. Because otherwise, it's chaos and jungle. And we don't want the jungle.

We want -- we don't want the zoo, either. But we want a park where people can expand, can express their talent and can achieve what they can achieve, be entrepreneurs more than speculators.

ZAKARIA: Let me ask you, as a senior French official, not just your finance portfolio. Has the election of Barack Obama lessened French anti-Americanism?

I mean, one of the things that Americans associate with France is the idea that France is going to be, in some kind of sense, in opposition to the United States on issues, and they're going to look down on Americans.

Has this atmosphere changed?

LAGARDE: You know, France and the United States, it's like an old couple. We've been at it for a long, long, long, long time. I think we were one of the first allies -- and certainly, one of the strongest -- of the United States. And our histories are bound.

The bloods of our soldiers are, you know, very, very much together throughout our history. The foundation of this country, the freedom of France -- all of that is getting us so close to each other that we are like an old couple. We've fought many battles together, and we will continue doing so.

ZAKARIA: And what stage are we in now? The marriage counseling stage? Or are we out of it?

(LAUGHTER)

LAGARDE: No, no, no. I think it's very good, actually.

What I can tell you is that, you know, we in France have a very strong leader at the moment. And I hope we keep it for a long time. When he was president of Europe for six months, we achieved a lot.

In this country, which I dearly like, President Obama is a terrific leader. And if these two leaders can actually join forces, which I'm sure they will, with in mind the same common good, they can deliver fantastic results. I certainly hope so.

Oh, by the way, there's a -- I want to mention that, because it's just fascinating to me. There was a poll that was just conducted recently about...

ZAKARIA: In France.

LAGARDE: No, in the United States. About the opinion that the American population has about France. And it was 61 percent favorable. So, 61 percent of the American population that was surveyed in that poll thought that France was great.

ZAKARIA: But this must be -- this must be up from the Bush years? Or do you know?

(LAUGHTER)

LAGARDE: Well, all I can say is that it seems quite positive. And I hope we can do everything we can to convince the other 39 percent that, yes, France is a strong ally and a friend of the United States.

ZAKARIA: Do you feel that the current administration -- and Tim Geithner, in particular -- are doing a good job?

LAGARDE: It's awfully difficult to pass a judgment, frankly.

I think that he is in charge of such a big job at the moment and has to face all these issues, while cooperating with all of us that are concerned about what is going on on a consistent and comprehensive basis, that he is doing the best he can.

Now, will it be good? Will it be average? Will it be bad? It's for the future to say. And the same goes for me. If you were to ask anybody, is she really doing a good job, it's too hard to say at the moment.

I think, you know, the proof is in the pudding. Sorry. The proof of the pudding is in the eating. That's how you say it.

And at the moment, we are working so hard in building the regulatory system, in making sure that we have the discipline in place, that the Financial Stability Board is capable of setting standards, that the IMF can actually, you know, sort of analyze what's going on throughout the world to send the right alarm signal if there is a need for that. It's very much a work in progress.

ZAKARIA: So, you really think that the jury is out for all of you whether you guys are doing the right thing -- until you see economic growth resume.

LAGARDE: You need to stimulate at the moment. And you need to stimulate on the basis of what I call the triple T. It's got to be temporary, targeted and timely, so that we don't really, you know, run the risk of having public finances that, for the long run, will be affected by massive deficit and by huge indebtedness.

So, we need to stimulate, but we need to do enough for a sufficient time, so that it kick-starts the economy. And then we can withdraw. Because it's not our business to actually be actively involved in the functioning of the economy.

At the same time, we need to regulate. And we need to signal to our constituents that we are not going to tolerate -- we, who are expending taxpayers' money -- we're not going to tolerate the kind of behaviors that we've seen in the last few years.

ZAKARIA: Now, this all happens, in some ways, in an awkward manner for you and President Sarkozy, because, you know, you came into office promising to deregulate, to reform the French economy. President Sarkozy was quite happy to be called "the American," or "the neoconservative."

And when he came into power, he was talking about, he wanted to glorify work, and he wanted to get away from things like the 35-hour week.

You were often parodied as being an American. And on French television when they do satire, they always have you speak lots of English words, because you're sort of supposed to be an American.

Now here you are. You're all of a sudden embracing a model that I thought you were trying to change.

LAGARDE: We're going to continue changing the model, actually.

But you have to look at it like that. The French economy was in a straightjacket. And frankly, my country was dozing a little bit.

And what President Sarkozy has managed to do is to try to -- is release a bit of that straightjacket, open up, allow entrepreneurs to contribute to the economy and get their business going, do away with the 35-hours absolute cap by instilling the overtime flexibility that is now available to companies.

We did an awful lot of reforms in the last 18 months, and we're going to continue doing so -- despite the fact that we need to fight the crisis head-on, despite the fact that we need to stimulate the economy, despite the fact that we need to properly regulate financial markets in a comprehensive and coordinated fashion, which means that we need to do it together.

ZAKARIA: Let me ask you about your personal story.

One of the things that people tell me -- friends of mine who do business in France -- that France is a tough place for women to achieve great success in the corporate world. It's still a fairly patriarchal culture.

Did you find -- what were the challenges for you, working in France, being the head of a big company?

LAGARDE: I'll tell you a story. When I applied with law firms right after law school, I applied with French firms, and I applied with international firms, and I applied with American firms.

And all the French firms that I applied with said, in the main, "You'll do fine. You've got the right curriculum. You're OK. But no expectations of partnership."

And I said, "Why?"

And they looked at me -- that was a while back -- "Because you're a woman."

That has changed. But that gives you an idea.

When I joined Baker & McKenzie, there was a woman who was the leading partner and said, "Yes, fine. You come in. You work hard. You get clients. You develop the business. And you have a chance to make partnership."

So, that was in the early '70s. And it has changed massively, and there's plenty of opportunities. But it is still a fairly patriarchal society.

And I think that, you know, it's a tribute to President Sarkozy to have been determined to have parity -- almost parity -- between men and women in his government: 15 ministers, of which seven are women, eight are men.

And of the seven women, we're not all in social affairs, health and education. I'm in charge of economy and finance. One of my colleagues is minister of interior, another one is justice.

So, he's given the very strong signal at the top. ZAKARIA: And is France changing in a broader sense? You know, we have an image of Europe in the United States -- perhaps unfairly -- that the IMF numbers again tell you why, which is that this is a place with a very large state. Perhaps, you know, as a result, a very good life for most people, but very little energy, very little vitality.

As one senior official of the Bush administration once said to me, he said, it's the world's greatest outdoor museum. Meaning its glories are behind it, it lacks the energy, the vigor to kind of confront the problems, the world of the future.

Is that changing? Is there a sense that that may always have been a caricature, but there was some truth to it?

LAGARDE: Well, you know, when I said to you earlier that there was this straightjacket and that the country was a little bit dozy, that's -- you know, that was a bit the case.

There was a -- we were very proud of our history, our monuments. And we should be proud of that, very proud of our cuisine, and we should be proud of it.

But I think that President Sarkozy's talent has also been about stimulating people, about encouraging, about -- you know, for instance, we gave a 30 percent tax discount for anybody who invests in research and development. We created the self-employed status, where people can actually go about starting their business, even though they are employed or retired or unemployed. That used not to be available as a status.

And those are sort of little examples of how actually innovation, energy, entrepreneurship is very much a part of the fabric of French society.

ZAKARIA: On that note, Christine Lagarde, thank you very much.

LAGARDE: Thank you.

ZAKARIA: And we will be back.

(COMMERCIAL BREAK)

ZAKARIA: Now for our "Question of the Week."

Last week I interviewed Paul Kagame, the president of Rwanda. Kagame has transformed his country in 15 years from the chaos and genocide we all remember to a model of stability and growth. He hasn't always done this democratically, and some have called him an authoritarian.

So I asked you, do some countries actually need a strongman? Might it take a tough, autocratic leader to turn a country around, as he did with Rwanda?

Our viewers are largely foreign policy realists. You said, "yes." Viewer Joseph Scriber (ph) put it this way. "The good probably outweighs the bad in a case like Rwanda. The U.S. must take a more nuanced approach in its support for democracy."

Barbara Hutchins (ph) was one of the few dissenters. She quoted the 19th century British politician, Lord Acton. "Power corrupts, and absolute power corrupts absolutely."

Now, for this week, I want to ask you, do you think the recession is ending? Not is it over, but can you see any light at the end of the tunnel?

Let me know what you think.

And as always, I'd like to recommend a book. I don't normally recommend novels, but it's summertime.

David Ignatius' day job is writing op-eds about foreign affairs for the "Washington Post," which he does very well. He moonlights as a spy novelist, writing about foreign affairs.

"The Increment" is his latest book, and it has me hooked. The title comes from Britain's intelligence service's real-life unit -- although they would deny this -- that has the license to kill, the famous James Bond license.

In this novel, the unit is called into help a CIA agent get an Iranian scientist out of Iran. The book has already been optioned by Hollywood, and I can see why. It's a riveting read.

Also, how closely have you been following the world this week? Test yourself. Try our weekly quiz, the Fareed Challenge, on cnn.com/gps.

Thanks to all of you for being part of this program. I will see you next week.