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Fareed Zakaria GPS

Interview With Treasury Secretary Timothy Geithner; Did Goldman Sachs Break the Law?

Aired April 25, 2010 - 10:00   ET



Now, imagine that you wanted to make a bet against a sports team, say the New York Yankees. You know that the team has had a great run, but you've also noticed that its players have been playing badly of late. You think that's going to ruin their record going forward, so you want to place a bet against the Yankees.

You ask a bookie to take the bet. Now, the bookie has to find someone who is willing to take the other side of that bet, in other words, someone who will put money down because he thinks the Yankees will keep winning.

Boiled down, that is the essence of the transaction that took place in 2007 on the direction that the U.S. residential housing market would go, up or down, with Goldman Sachs playing the role of the bookie.

The government now alleges that Goldman Sachs perpetrated fraud. I don't think they have a case.

The government alleges that John Paulson's hedge fund shows the securities that they wanted to bet against and ask Goldman to find someone who would bet on the other side. Goldman says Paulson was consulted but didn't actually chose them.

But even if Paulson had chosen the securities, why is that illegal? This is how markets worked, somebody picks a bundle of stocks or securities they wish to bet against. They then ask companies like Goldman Sachs to find someone who would take the other side of that bet.

Naturally, the guy who's betting against the stocks or securities thinks that they are garbage, that's why he's betting against them. The guy betting in favor disagrees, and it is that disagreement on the quality of the stocks or securities that makes the market. Goldman Sachs' role is to be the intermediary and collects fees from both the buyer and the seller.

Now, the government says that had the people who were betting that housing prices would rise know that John Paulson was betting against them, they would not have taken the bet. That's absurd. In 2007, John Paulson was a nobody, a medium-sized hedge fund manager who had been wrong about the housing market for a while. Had the bet been made six months earlier, it is Paulson who would have lost $1 billion and the other investors would have made money.

What is happening here is a familiar trend in America after a boom and bust. We all feel embarrassed and ashamed and somewhat culpable in having glorified industries, products and people that then crashed miserably.

In order to expiate our sins, we turn on the very people who we used to lionize and throw them to the wolves. We criminalize what were standard business practices, some of which might have been aggressive, none of which were illegal.

Now, I'm all for financial reform. Derivatives should be regulated. There should be capital requirements for credit default swaps. Maybe they shouldn't even be legal, but you can't make those decisions retrospectively.

I'm in favor of tighter regulation, but I'm also in favor of the rule of law, of due process, and of equal justice, even for people who make tens of millions of dollars.

That's my view. You'll hear others as we've convened an extraordinary panel to talk about all of this.


ELIOT SPITZER, COLUMNIST, SLATE: I think there's a deeper issue here. This case presents an existential threat to Goldman and all the investment banks because, having given them huge sums of taxpayer dollars to bail them out, taxpayers and others are now saying this is what they do?


ZAKARIA: But first, I flew down to Washington to have a candid conversation with Timothy Geithner, secretary of the Treasury, about all this and the broader economy. Stay with us.


ZAKARIA: Mr. Secretary, thank you for joining us.


ZAKARIA: You know, whenever people talk about you, there is often a mention of your ties to Wall Street, and, in point of fact, you've never worked on Wall Street, you were chairman of the New York Federal Reserve, which is a kind of oversight body, but you've, as far as I know, never held a private sector job.

You've been -- worked in the public sector. I guess you worked for Kissinger for -- for a brief period. GEITHNER: Yes, I don't think most people think that counts as the private sector.

But, I used to -- what I'd say is I never had a real job. You know, basically almost right out of graduate school I came and worked as a very junior public servant at the Treasury and spent my entire professional life since in some form of, you know, policy job.

ZAKARIA: But how does it make you feel when you hear these charges that you're somehow in bed with Wall Street firms?

GEITHNER: Well, I find that the charge that -- that the myth that I worked in Wall Street somewhat amusing. But it is part of a narrative that hardened, which is that people came to view the judgments we were making through the prism of a myth, that we were here with a background experience tarnished by that, which is not true.

So, I think it's actually very damaging. It's completely false, of course, and it, you know, should have been corrected a long time ago. But newspapers of record across the country wrote that. Some of them keep writing it. I don't know why it's the case.

ZAKARIA: Let's talk about financial reform. The financial industry is an area where the United States had the leading competitors in the world. It was an industry the United States dominated to a large extent.

The -- is there a danger that in doing the financial reform you make it impossible for the Goldman Sachses of the world, the Morgan Stanleys of the world, the Citigroups of the world, to be the kind of large global players that they have -- that they were in the past?

GEITHNER: Excellent question, and I think, actually, we have quite the opposite.

I think that our system as a whole is not going to just be more stable, but I think our institutions are going to be much stronger on a relative basis, relative to their global competitors in these markets. Because, again, the basic strategy that guides reform, and it's guided our response to the crisis, is you bring more transparency, bring more disclosure, you force more capital into the system earlier, and you make sure you put in place basic things that make markets work better.

The -- the great defining strength of our system was not just the broader integrity of disclosure requirements and those things, but our system was great at taking the savings of the world and giving them to growing companies, to good ideas.

So, the -- the great companies of our time were built on the strength of that basic system, and we're going to make sure we preserve that fundamental strength. But, to do that, we got to make sure we have a system that's a bit more stable over time and does a better job of working for, you know, the customers of banks. ZAKARIA: Why -- if that's the case, why do all the big banks feel otherwise? They all feel as though you're actually going to make them less profitable, less competitive globally?

GEITHNER: Again, just think back and think what this crisis showed. How good was this system for a bank shareholder? It wasn't so good. How good was the system for a company that relies on banks to provide credit?

You know, they went from banks falling all over themselves to lend them money at unrealistic rates, to credit drying up in a heartbeat. And you had companies fail by the thousands because of that. You had companies that couldn't expand -- had to delay expansion because that couldn't, you know, finance a -- a patent that they needed.

That system didn't work so good for our country, and that's why I think these reforms are not just so important for future growth but they'll be better for the overall public interest and having a strong, stable institution.

The -- the institutions are fighting these reforms, and they're not all fighting it. But some are fighting the reforms because they think that they have the chance to carve themselves out of these protections and gain some short-term benefit from that.

But we're not going to support a bill that is weakened by the exemptions that leave the system in place, because that would be irresponsible for the country.

ZAKARIA: You want to get Republicans on board. You've said --

GEITHNER: And we will. I'm very confident. I think we're going to have very strong support from Republicans for a strong bill.

You know, I spent a lot of time with them, not just over the last 14 months we've been discussing this, but certainly over the last few weeks or so. And, you know, what they say to me, and I believe them, is that they want to support a strong bill.

Nobody wants, you know, after a crisis that caused, you know, eight million people to lose their jobs, this degree of pain and suffering. I think everybody has to be for reform, and it's very hard for people not to be against the kind of strong reforms that we've laid out.

ZAKARIA: But yet you only got one Republican on the Senate -- on the Senate committee and Senator Grassley said this does not mean he'll support the final bill.


ZAKARIA: And you don't have a single other Republican who's come out in favor.

GEITHNER: You know, but they're doing what you would expect, and I think you'd do the same thing in their -- in their shoes, is that they're trying to maximize the chance they have leverage still to pull this bill in certain directions.

But, again, based on all my conversations -- and I think if you listen carefully to the tone in Washington just over the last couple of days, I think there's been a substantial shift, and there -- I think, really, on balance, there are a very substantial number of Republicans who want to be for a strong set of reforms.

And, again, I say this on the basis of what we tell -- what they tell me in private, and I think you're right (ph) --

ZAKARIA: You will get 10 Republican votes?

GEITHNER: That's -- that's really up to the majority leader and the -- and the minority leader in the Senate. I can't say what we'll get.

But, again, I think that on the substance, we are very close now.

ZAKARIA: If the reforms pass and Lehman Brothers had gone -- gotten to the point it got to that day, what in this bill would have made Lehman Brothers not blow up?

GEITHNER: Excellent question.

With this -- these reforms that provide a way of bankruptcy-like mechanism for dismembering banks safely without the taxpayer being exposed, without the risk of collateral damage, it would have allowed to us come in earlier and, in effect, put Lehman into receivership, break it up and dismember it over time without it causing the panic that it provided.

So the -- a bankruptcy provision designed for bank -- large banks, combined with the necessary capacity to spray a little foam on the runway. An example is, you know, your neighbor's house is on fire. You want the fire station to come and make sure the fire doesn't spread, and they do that in part by, you know, hosing down the neighboring buildings.

And so that's the balance, that you want to make sure you can draw a circle around the failing institution, isolate it, make sure the fire can't jump the firebreak and go and affect the entire financial system.

ZAKARIA: When you look at America's housing policy, I mean, we -- we have all these massive distortions that we put in place. We -- you know, this interest is -- the mortgage interest is deductible, you don't pay taxes on it. You don't pay capital gains tax when you sell your house.

You -- the loan is non-recourse. You can just walk away from the loan. Then you have Fannie and Freddie Mae (ph) pouring money into the system.

Is it a surprise that it caused this enormous bubble and shouldn't the fundamental reform really be that we have to rethink all of that?

GEITHNER: I agree. That's the -- that's the argument, in some ways, for doing reform in these stages, because it is a very complicated mix of decisions. It's not just Fannie and Freddie.

But let me give you a slightly less dark perspective on it. That system, that housing finance system, worked exceptionally well for many decades. It was sort of the envy of the world, and many -- many countries came and replicated the institutions we built to provide a fixed rate, 30-year mortgage that substantially expanded opportunities for homeownership, appropriately so, over a long period of time. It worked very well across a whole series of recessions in this country over time.

We made these two terrible mistakes in basic government policy over this period of time. One was to let Fannie and Freddie start to build up and hold a range of risky securities that are not centrally related to their basic function in housing markets, making housing more affordable, without holding the capital necessary to support that.

They did it because they wanted to pass on more gains to their shareholders. Homeowners didn't benefit from that. That was an avoidable mistake, and -- but it was fundamental to what made them so vulnerable.

A second mistake, everyone is familiar with, because we've been watching it happen now for five years, is that we allowed a whole parallel industry of banks emerge outside the protections and constraints for consumers built around banks in the mortgage market that led to the subprime crisis. A huge erosion in basic protections, a huge growth in predation abuse in that area.

That had nothing to do with Fannie and Freddie. It was broader failure of policy by governments. And those are two very important things that we need to fix.

The first we're going to do is financial reform. The second we'll do is -- but we've already fixed, and we prevented that from getting worse. The second we'll do when we take on this broader challenge.

ZAKARIA: And we will be back with the secretary of the Treasury, Timothy Geithner, right after this.



GEITHNER: So I'm much more confident than I have been any time these last two and a half years of crisis because, again, we did enough early with enough force that we were able to right the ship.



ZAKARIA: And we are back with the secretary of the Treasury, Timothy Geithner.

In the decision you made to recapitalize the banks rather than take them over, as many people were suggesting, did you realize that the effect would be that the financial industry would recover faster than the general economy and, as a result, of course, banks were going to be profitable quickly, they were going to pay themselves large bonuses, and you would have a huge political problem, which is that it seemed as though the bankers were getting rich while the rest of the economy was still in the doldrums?

GEITHNER: Not nearly as big a problem as if we'd adopted the alternative strategy, because the alternative strategies of either letting them -- hoping the fire burn itself out, letting them fail en masse, or having the government of the United States come in and take them over and take, on behalf of the taxpayers, all that burden of losses, would have been dramatically worse for the American economy.

So unemployment would have been much higher, the economy would not be growing today and the fiscal burden for the country, for the future, for our children, would have been dramatically higher, trillions of dollar, potentially, for us.

So, this was a -- the classic example of the basic reality of governing by principle, which is you do what is right in the interest of making things better, even if it's going to be short-term politically costly, because the consequences are likely to be worse longer term.

So, I'm -- I'm sure it was a better strategy than those alternatives. And what you see today in the financial sector is fundamentally a reflection of the fact that the economy is growing again and people can borrow again. So it's not a sign of -- it's a sign of strength, not a source of concern.

You cannot have a system which -- a financial system earns money without people being able to borrow again, raise equity, raise debt, and that's part of what is necessary to let economies grow.

So you cannot have growth without credit. And, when credit is available, you'll see banks starting to be able to be in business again. That's a sign of health.

ZAKARIA: The way you guys have been -- and the administration have been handling this has been the stimulus package, help on the mortgage front, help with the auto sector, the Federal Reserve has been pumping liquidity into the system.

At some point, that has to end.


ZAKARIA: Do you worry that when the federal help to the economy starts tapering out, we will be in for a double dip?

GEITHNER: I'm not worried that -- and the reason I'm not worried is because I think that we're going to be careful not to put on the brakes before we're more confident. You've got a -- a private sector- led recovery in place that's going to be able to withstand the effects of the restraint.

You know, as you know, we're already starting to walk back the emergency measures we took in the crisis. We made a lot of progress winding down. We're putting TARP out of its misery. The Fed's mostly ended its emergency programs.

That's all necessary and desirable and we're going to start next year to start to bring the deficits down quite sharply over time.

ZAKARIA: But you still look at the Federal Reserve, it has 2$2.5 trillion on its balance sheet. That's almost two and a half times as it -- as much as it did when the crisis started.


ZAKARIA: You still have very low interest rates.

Aren't you worried that you're feeding a new bubble of sorts? I mean, if you look at -- there's a book I'm sure you've seen by Ken Rogoff which talks about the history of the last 500 years, and, in each case, the effort to -- to deal with the financial crisis, what ends up happening is you create a small bubble of -- of its own because you flooded the market with cheap credit and liquidity.

GEITHNER: Of course, our strategy was guided very much by what Ken Rogoff wrote about, which is a history of crisis. It shows that if you mismanage them, they're hugely expensive and costly over time.

But what we did is to move much earlier than countries ever have moved, with much more force early on. And, in the financial sector, we did the very important thing by forcing banks to open their books and to recapitalize with private money.

We had the government get out of the financial sector much more quickly and have the private sector bear a much greater share of the burden for solving the crisis. And because of that, the fiscal cost of this crisis, because of those two basic choices, one is to put overwhelming force into righting the ship, putting out the fire, and by adopting a strategy that forced the private sector to carry more of the burden of recapitalizing the financial sector, this is going to cost us much less in fiscal terms than even the S&L crisis, which was a much more modest crisis, much simpler crisis to solve.

ZAKARIA: Do you feel confident that this balancing act that you're trying to achieve of pushing enough stimulus that you can keep the economy going, but then withdrawing it so that you don't create another bubble, you don't create other -- other problems, you're sure you're going to get this right?

GEITHNER: Well, it's a -- it's a challenge to get the balance exactly right. But I think we have a very good chance. I'm much more confident than I have been at any time these last two and a half years of crisis because, again, we did enough early, with enough force that we were able to right the ship.

And, really, there's very encouraging signs across the economy today that the private sector is getting stronger. You know, it's still a very tough economy, and, as I said earlier, it's going to take a long time to heal what was damaged across the basic American sense of security.

It's going to take some time, and we're going to keep working to make sure people get back to work, incomes are growing, the gains of growth are shared more broadly. And since I'm much more confident that we're going to salvage that, I'm also very confident that we're going to have the will as a country to start to bring down those deficits over time.

Again, if you listen carefully now, the entire tone of the American political debate on budgets has changed, and we had a long period where people said -- some people said deficits don't matter. Governments don't have to pay for things. You can cut taxes for the rich. You can do huge, expensive new programs without paying for them. That's changed dramatically, and nobody can look at our fiscal position today, after a long period of living within our means, and say that we can afford to ignore that later.

So I think that helps a little bit because that means it's going to be easier for us to do the right and the necessary thing when the economy's stronger.

ZAKARIA: Tim Geithner, thank you very much.

GEITHNER: Nice to see you, Fareed.



SPITZER: I think there's a deeper issue here. This case presents an existential threat to Goldman and all the investment banks, because having given them huge sums of taxpayer dollars to bail them out, taxpayers and others are now saying, this is what they do?

In other words, if this is what they're doing, why are we -- why are we bailing them out?




ZAKARIA: From Goldman Sachs to the global economy, political brawls in the U.S., political brawls in the U.K., there's lots to talk about this weekend. We've got a great panel.

Let's get right to it.

Eliot Spitzer, a columnist for "", who is of course the former governor of New York and the former Attorney General of New York. Andrew Ross Sorkin is the Chief Mergers and Acquisitions reporter for the "New York Times".

Martin Wolf is the chief Economics commentator of "The Financial Times", and Amity Shlaes is a senior fellow at the Council on Foreign Relations, also a columnist for "Bloomberg".

Welcome to you all.

So, Eliot, let's assume that I am a big oil company, and I want to in some way mitigate the exposure I have to oil. That is, I have a lot of -- if oil goes up, I'll do fine, but what happens if oil goes down?

So I say I want to make a bet. I want to make a bet that the oil market will go down so that if it the oil -- if it goes down I have some -- I have -- you know, my balance sheet doesn't look awful. And I go to Goldman Sachs and say find me somebody who wants to take the other side of this bet. What is wrong with that?

And that is, in effect, what Goldman Sachs is being charged of having done, which is allowed John Paulson, the hedge fund manager, to select securities.

They're denying it, but I'm saying even if he did that, isn't the whole point of these bets, somebody says I've got something I want to bet against. Find me somebody who wants to bet for this.

SPITZER: Right. It's a good thing I didn't argue against you as a lawyer. You're very good.

Here's the problem. You're correct. This is zero-sum game and those on one side of the -- of the bet know that the other side of the bet disagrees with them. The problem is that Goldman fundamentally misrepresented how it put together the product, and that misrepresentation, if it is deemed to be material, is then the predicate for finding them liable.

ZAKARIA: So that's the crux of the issue.

SPITZER: The crux of the issue, as a legal matter and emotionally, is it material that Goldman, when it pretended to neutrality in creating the product, which is how it presented itself to its clients, in fact was designing something designed to fail?

ZAKARIA: OK, does it --

SPITZER: Even if you're correct that one can imagine a situation where I know you -- you think it's going to go south, I think it will go north. We sell at an agreed-upon price, no problem. But if there's a misrepresentation, that changes the dynamic (ph).

ZAKARIA: And will you tell me if I'm right, in 2007 the idea that if you knew that John Paulson was on the other side of a bet from you, you would quiver, John Paulson was a mid-level hedge fund manager who had been wrong about the --

ANDREW ROSS SORKIN, NEW YORK TIMES: Nobody knew who John Paulson was, and you're right. Goldman's best defense is that people who were taking the long side of this thought that whoever was on the other side, whether John Paulson or somebody else, was the sucker.

I think that Goldman's best defense, from a materiality standpoint, is the sense that they showed the buyer in this case the entire deck of cards. They got to look through every card. They could put it in their own model. They could decide whether these cards were good.

In fact, the independent group that was supposed to verify these things kicked half of the cards out of the deck.


SORKIN: So, that -- the only thing they didn't know, potentially, and it may have been misrepresented, and that's what we don't know, is that John Paulson created the deck.

But the fact that you actually got to see all the component parts, I think, is probably the most material --

ZAKARIA: And of course -- of course Paulson thought it was -- that this was garbage, that's why he wanted to short it.


I totally agree. I think you're right. They -- they were able to look at the component parts of the investment, so you can say what -- why does it matter who put them in there?

I think there's a deeper issue here. This case presents an existential threat to Goldman and all the investment banks, because having given them huge sums of taxpayer dollars to bail them out, taxpayers and others are now saying, this is what they do?

In other words, if this is what they're doing, why are we -- why are we bailing them out?

ZAKARIA: And that's a -- that's a -- that's a -- to be fair, that's a bigger question, and it doesn't --


ZAKARIA: -- you can't --


SPITZER: -- the question, so I think you've got -- the argument is too good on the other one.

ZAKARIA: Because you're -- you can't retrospectively criminalize things, just because you don't like what they're doing.


ZAKARIA: What do -- what do you think?

WOLF: My view is, for some reason it's a cultural thing. The Americans like to think that what's happened here is that something is crooked and that the real issues, if we can only find the crooks, the problem is solved.

In some cases, as Mr. Spitzer pointed out, that actually was quite important, in other cases. But, in this case, this is not the problem.

The problem, I'm thinking, in this case is what was legal. And that's -- and, in this case, the interesting thing is who was on the other side?

Well, it turns out on the other side was some European banks, which then end up having to be bailed out by their taxpayers. Now -- and one of those set of taxpayers is me, as a British taxpayer for the Royal Bank of Scotland. We're talking about (ph) ABM AMRO.

And I don't think they should have been involved in this bet at all. That's not what a bank exists for. And that, to me, is the really big issue.


SORKIN: That's -- no, he's -- that's exactly the issue. This case points up the bigger question that you raised in the beginning about whether these instruments should exist at all. And, while I would argue that you are correct in that there are certain times when a company might want to actually bet against something to hedge their own risk, these were really just bets, you and I betting on a baseball game.

There was no value, no social utility. Nobody was getting an additional mortgage because these people were making these bets. These were literally derivative bets on top of other peoples' bets.

SPITZER: And that's why -- and that's why the current law that's being discussed is so inadequate, because it doesn't even get to this fundamental question.


AMITY SHLAES, COUNCIL ON FOREIGN RELATIONS: One reason that an attack on Goldman resonates is people are tired of deal-based Wall Street. Wall Street and Washington. So Goldman is the best one to deal with. The highest. So the attack -

ZAKARIA: I think it's just honestly envy. They are the guys who make all the money.

SHLAES: But you know, what is fairness? Fairness is prices, it's not deals. So you say if I know the price of something I will buy and sell it. Yet this entire rescue period is about who you know, how you deal? Do you succeed in your deal? And whether you're left or right, you are uncomfortable with that. You're like, what is the price? How much does it sell for? So that's the motive that inspires those who agree with the investigation.

ZAKARIA: You know, I'm struck going forward how do you get rid of this? Because my instinct is yours Andrew, which is the CEOs that many of these esoteric, you know, bonds based on bonds based on mortgages don't serve any purpose, I don't really understand what purpose credit default swaps say, why should I be able to buy insurance on your house and then I have an incentive to burn it down.

But how do you draw the line? How do you figure out, Martin, when it is a company that operates in 25 different countries, and has all these currencies it has to worry about, and it has to mitigate the complexities by creating these financial instruments and how do you say, you know, what is the line which says that's all OK? That's the normal balancing of risk, but this is now pure speculation?

WOLF: I don't think we can do that. I feel very strongly about this. But I do think we can say that if you're a major financial institution, which is guaranteed by the state, then you have to put up a lot of capital against this sort of transaction, and then you will wipe out the many institutions of the potential profitabilities.

It is Mr. Paulson betting against another hedge fund, I don't there's a big systemic issue. But there's a systemic issue if major commercial banks are engaging in what is a purely speculative activity. The way to do that is to tax it.

SPITZER: I think Martin is exactly right. The entry point should be to whom do we give guarantees? When the government is intervening by giving guarantees to institutions, then we can legitimately prescribe what they do and how they do it.

ZAKARIA: Let me ask you about the politics about this. You were also an elected governor. The Obama administration proposes financial reform. The Senate holds hearings on it. The SEC has to testify, and then suddenly on that day that the SEC is testifying in a 3-2 verdict which is very rare for the SEC to proceed with an indictment. It comes out with this. It seems fishy.

SPITZER: Let me say, I don't believe in coincidences. So I think they wanted to get this out there during that discussion. That doesn't mean it's wrong. I mean, it can be both -

ZAKARIA: The SEC is supposed to be independent.

SPITZER: They are independent and they are also trying to show the world they enforce the law and they are entitled to use cases that have a more general prophylactic impact, that's general deterrence, to say to the world this is what happens.

And so it's not wrong for them to make a case and bring it out at a moment when it will have the greatest general deterrence effect. That's what they did. Is it a strong case? Separate conversation. Did they want to get it out there now? I have no doubt they did and that's why they push it.

ZAKARIA: All right. On that note of agreement, we're going to take a break and we'll be back.

SPITZER: Are real jobs going to come back that will increase real median income over a 10-year time project, not one or two quarters? And I think the longer-term trend line in terms of competitiveness and creativity of our economy, these are Asia and even parts of Europe worries me enormously.


ZAKARIA: And we are back with our panel, Eliot Spitzer, Martin Wolf of the "Financial Times," Andrew Ross Sorkin of the "New York Times," and Amity Shlaes of Bloomberg and the council on foreign relations.

Martin, what does the American economy look like? We seem to be in a pretty broad recovery, corporate balance sheets very strong, but there is great fear about what happens when the stimulus money runs out.

WOLF: The obvious question is is this a real recovery driven by genuine private sector activity or is it the result of government actions? Part of it is obviously a fiscal action. I actually think nearly all of that has been just the built in automatic responses to a recession.

That's not what's getting you out of the slump. It's what prevented a depression. The really big thing, I think, is the actions of the fed. The fed became the dominant financial institution in the United States. It lent everywhere, it is supplying free money to the financial system. It had a dramatic effect in reliquidating the economy and is far and away the most aggressive central bank in the world. So I'm not surprised that we're getting this.


ZAKARIA: That's a good thing?

WOLF: That's a very big question. It's a very big question. We don't know how this will play out over many years. There are real risks with what they're doing.

ZAKARIA: Big difference between what the fed is doing now and what the fed did during the Great Depression. In fact, you could argue that Ben Bernanke, student of the Great Depression learned from their mistakes and do the right thing, yes or no?

SHLAES: Overdid it. Ben Bernanke is overdoing it and overdid it. What happened in the Great Depression was there wasn't enough money and the fed didn't respond fast enough or understand it and the politicians didn't either. Both parties at first. Finally they realized they needed more money and the government tried to figure out how to make it.

That's what Chairman Bernanke studied. He studied actually home foreclosures and saw how people lost their homes even if they owned 90 percent of them. And just on that 10 percent loan they lost it all across the country. And he said I'm not going let that happen. Again, I think he thinks of himself as a cardiologist, a surgeon. And he sees a heart stopped, and he is going to make that heart go. And he promises it won't be like the '30s.

But what if the patient who is lying on the table, the U.S. economy, has an endocrine problem and needs thyroid medicine and his coma has nothing to do with the structure of his heart or his arteries. It's the sort of monolithic all-monetary approach that is problematic and also for it in regard to recovery because this concern that Martin has it's right. I don't think we have recovery until we have good employment. It's cruel to say we're OK when we have 9.7 percent unemployment and more than double that for teens.

SPITZER: Huge unemployment numbers. I worry that yes, we pushed all this money into the system, a momentary bounce. Are real jobs going to come back that will increase real median income over a 10- year time horizon, not one or two quarters. And I think the longer- term trend line, in terms of our competitiveness and the creativity of our economy, these are the Asia and even parts of Europe worries many enormously. And that's where I think we need to make massive investments in the sort of innovation economy-type jobs.

ZAKARIA: Let's talk about this easy money for a moment. The lowest interest rates, you know, ever really. And so it probably makes sense right now to borrow. But what are we doing to the economy? We know when the cost of capital collapses, when interest rates go very low, people do stupid things. I mean, that is really what happened between 2004 and 2007. So what are the stupid things we're doing now?

SORKIN: I don't think they're there yet. I think, by the way that Eliot is correct. The disconnect is going to be on the unemployment picture, which that 9.7 percent number is actually get to 10 percent this year any way, and so whether we get real growth, that's a real question. But to flip your question around what worries me most is all this money we pumped into the system has to be pumped out.

And there is -- has to be a moment of reckoning. And that's the real question, I think, over the next 12, 18 months, what happens then.

ZAKARIA: You used to write in the "New Republic" when you were attorney general about a democratic party that had a different approach to economic growth. The Obama administration does seem to be adopting what you were saying and what Martin is saying, you know, it's focusing on exports. It's focusing on manufacturing, it's focusing on investment. It's trying to say we're getting out of the businesses of selling each other our houses in a kind of ascending spiral of asset inflation. Is it on the right track? SPITZER: It's on the right track, the question is can it succeed. It's a very difficult thing to reformulate an entire economy. That's why I'm curious to see where are investment dollars going? All the money we have given the investment banks, are they being invested here or overseas? What percentage capital flows are we seeing? I see articles every day about major houses creating fund after fund to invest in Asia.

Wonderful. That's what the capital markets are there for but if that's what's happening, that says to me over the next 10 years, the jobs that we were just talking about will not be here, will be elsewhere. And so unless we can create opportunities here which is something the government should be doing with high-speed rail, with R&D investments, with education investments. Those sort of things that facilitate the market, innovation. Unless we do that in spades, we'll be in deep trouble.

ZAKARIA: Do you agree with that?

WOLF: I would emphasize that the U.S. remains incredibly innovative. It still is, quite clearly. Just about anywhere in Europe and I don't think that's going to end. I think it's where people want do this. And that is important for the future. But there are other things that are not happening which worry me. Corporate America is not investing. Corporate America is not -

ZAKARIA: It has a lot of cash.

WOLF: It is running enormous cash surpluses but it's not investing. Now, that is, I think partly to do with the tax structure which strongly subsidize accumulations of cash, but that's a very big issue. You need that. You need a much more competitive export industry because clearly if you look at the balance of U.S. economy, you can't continue with a huge, account deficit. It can't. It don't have the means to offset these huge deficits in productive spending at home. That's part of the problem that occurred. So there are taxes, a big issue, but I actually think the shape of the economy is also a big issue.

SHLAES: Two things to say there. Why are corporations not investing? They're not investing because of the environmental uncertainty, which is a policy problem. Not a business cycle problem, a policy problem.

ZAKARIA: You mean the environment of ledger regulation.

SHLAES: Right. They don't know what's going to happen next. So maybe they won't hire -


ZAKARIA: We have to get off the economy. Because I want to ask Martin Wolf. We have the privilege of having Martin Wolf here because of the ash cloud, which has prevented him from going back to his native London. Why is the third party candidate, the liberal democrat surging so far forward in the polls? You have the bizarre situation where Nick Clegg, the leader of the liberal democrats is more popular than any British politician since Churchill.

WOLF: I think two things are happening, which is interestingly different from here. Politics in the U.K. has become vastly less trifle and less, vastly less ideological over the last three decades. So people don't really see any big difference between the two big parties anymore. Then there's no huge ideological engagement.

Very different from the Thatcher era and the second thing that has happened is they are absolutely fed up with Gordon Brown. They really want him out, but this guy Cameron just doesn't do it for them. It's obvious he just doesn't do it for him. So here is this man who has emerged from nowhere and he has the great advantage that he looks rather good and nobody knows anything about him.

ZAKARIA: Eliot Spitzer, Martin Wolf, Andrew Ross Sorkin, Amity Shlaes, thank you all. We will be right back.


CANDY CROWLEY, CNN SENIOR POLITICAL ANALYST: I'm Candy Crowley, and here are stories breaking this Sunday morning. Officials in Mississippi are assessing the damage from yesterday's tornado. Ten people are dead, at least 100 homes are severely damaged. That number may rise as rescuers try to reach isolated rural areas. Many of the fatalities are clustered around hard-hit Yazoo County where witnesses describe the twister as monster-size.

President Obama will deliver a eulogy today for the 29 West Virginia coal miners killed in an explosion earlier this month. Before the service, the president along with vice president Biden is expected to meet privately with the miners' families. The April 5th blast at the upper big branch mine, was the nation's worst coal mine disaster in nearly 40 years.

President Obama has since called for sweeping review of mine safety laws. CNN will have live coverage of the president's eulogy when it happens. Our live coverage begins at 3:00 p.m. Eastern. Those are your top stories here on "State of the Union." Up next, much more of "Fareed Zakaria GPS," followed by "Reliable Sources" at the top of the hour.


ZAKARIA: Now for our "What in the World" segment. What got my attention this week was a political phenom. A liberal running on a platform of change, born overseas, attended college in America, likes the camera. The camera likes him. A great public speaker who seemingly came out of nowhere.

No, it's not Barack Obama. It's Nick Clegg. Never heard of him? Well, until about two weeks ago, few people had. Now he has the highest poll ratings in Britain since Winston Churchill in 1945 after winning World War II. Clegg's approval rating clocks in at an astonishing 72 percent, and he's beaten his better-known competitors in many polls in the run-up to the U.K.'s general election, which is to be held just 11 days from now. So what made this man who is married to a Spaniard, is himself a product of a Dutch mother and a half Russian father, what made this international man a suddenly favored son of Britain?


NICK CLEGG: I believe the way things are is not the way things have to be.


ZAKARIA: For the first time in history the Brits have put on an American-style television debate. Remember the first American American-style televised debate was in 1960 between Richard Nixon and John F. Kennedy and Nixon had the 5:00 shadow that doomed him. It all but killed his candidacy. The first such debate in Britain was all but a kingmaker for Nick Clegg.

Before the debate, he was referred to as the other one. It was Prime Minister Gordon Brown, his chief rival, David Cameron, and the other one. But with this role reversal, now it's Brown and Cameron who have been sidelined. What also helped Clegg's cause is the fact he doesn't belong to either of the mainstay parties in the country. Labour, Gordon Brown's party or the conservatives, the party of Margaret Thatcher and David Cameron.

There is an exhaustion with the Labour party, which has been in power for 12 years. There is an apprehension about the Tories and David Cameron, and here is Nick Clegg, and his liberal democratic allies -- clean, fresh, and representing change. People whether in the U.K., the U.S. or elsewhere are looking for a sensible center in politics. Someone who will honestly diagnose the country's problems, no ideological purity, practical solutions. That's what people want.

Ideology is really for the extremes, the vast majority in the middle want sensible solutions. So what happens if Clegg keeps the momentum up until election day? Thanks to the oddities of the British election system, even if Clegg and his liberal democrats do slightly better than the two main parties in the popular, they will get many fewer seats in Parliament.

So it's very unlikely we'll be calling him Prime Minister Clegg, at least in the near future. But you never know how elections turn out. We will be right back.


ZAKARIA: Now for our question of the week. Here's what I want to know. Do you think Goldman Sachs is guilty of fraud? You can answer yes, no, or I don't know enough to say. That's allowed. Just let me know what you think.

And as always, you can go to our web site to see some great answers to last week's questions.

And remember, to make sure you never miss a show, go to iTunes and subscribe to our weekly podcast. It's free. You can't beat that price. Now, as I do every week, I would like to recommend a book. With all the allegations that banks have been misleading investors, I thought everyone could use a simple primer on investing.

And the best one of those I've seen is a new one. It's called the "Elements of Investing" by Burton Malkiel and Charles Ellis. It is styled after Strunk & White's ageless guide to writing, "The Elements of Style." It is brief, smart and easy to read. Everyone will profit from reading it.

And now, for the last look.

Russian rap reportedly has a new hero. It's the unassuming man in the gray sweater right there in the front row. Yep, that's President Putin. This man who proudly touts his education on the streets of St. Petersburg was nominated for the first annual Russian Street Awards honoring the best in Russian hip-hop.

The award nod came for this performance that you're looking at. But it wasn't his dance styling the Russian people were impressed with nor was it his rhyming skills. It's what he has to say about hip hop. Street rap may be a little rough, Putin said, but it contains social meaning. He went on, graffiti becomes a real elegant art. Break dance is something special. After all those efforts at being hip, President Putin didn't get the prize. Sorry, Mr. President.

And thanks to all of you for being part of my program this week. I will see you next week. Stay tuned for "Reliable Sources."