Zakaria: U.S. no longer 'cutting edge' of capitalism

Editor's note: Fareed Zakaria is a foreign affairs analyst who hosts "Fareed Zakaria: GPS" on CNN at 1 p.m. ET Sundays.

NEW YORK (CNN) -- President Bush and Treasury Secretary Henry Paulson on Friday outlined a series of far-reaching steps, likely to cost hundreds of billions of dollars, aimed at stemming a widening financial crisis that is roiling the financial markets and undermining confidence in the banking system.

"We must act now to protect our nation's economic health from serious risk," Bush said at a White House news conference. "There will be ample opportunity to discuss the origins of this problems. Now is the time to solve it."

The plan will be fleshed out in the coming days in meetings including Paulson, other Bush administration officials and lawmakers.

CNN spoke to world affairs expert and author Fareed Zakaria about the financial crisis.

CNN: Is the crisis over?

Zakaria: I haven't a clue. And frankly no one does. The Federal Reserve certainly thought it had stabilized markets after the Bear Stearns bailout. The most recent plan does sound like a comprehensive -- and costly -- fix. Over the longer term, there remains a danger given the way investment banks work. They are really hedge funds that take a huge amount of leverage and that is inherently risky because unlike hedge funds they are often too levered and too big to fail.

CNN: How is this going to affect me?

Zakaria: That is actually a good question. Wall Street is only a small part of the $14 trillion American economy, but it does provide the credit that keeps the rest of the economy humming.

If a bunch of Wall Street banks collapse that is not the end of the world, but if you can't get a loan to buy a new house or car and if companies can't get loans to build new factories then it begins to spill over into the general economy. There is right now a credit crunch but that might well pass if the Treasury's actions bring stability to the markets. The key is that the housing markets have to get stable. If they keep falling, all the assets tied to them will keep falling.

CNN: Is more regulation or less regulation the answer?

Zakaria: It's really a false dichotomy. Markets are created by regulation. If you want to find the absence of regulation, go to Haiti or Somalia. What we need are good regulations that let markets work with stability and efficiency. Too little regulation caused this problem in some ways, but so did bad regulations -- for example those involving Freddie Mac and Fannie Mae.

CNN: What should the candidates be saying?

Zakaria: I think [Barack] Obama is closer to being correct on this. John McCain rails against greed but you can't outlaw greed. Very few people broke any rules. The problem is the rules are screwed up and allow some extremely risky behavior. Obama talks about a 21st-century set of regulations for the American financial industry. That is the right direction.

CNN: Does the financial crisis have broader implications?

Zakaria: I think so. As Martin Wolf, one of our panelists on GPS this week, said, "These events cast a real shadow on the American model of capitalism that we've been promoting around the world for the last two decades." Whatever their problems with American foreign policy most countries saw America as the cutting edge of capitalism. No more.

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