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FAREED ZAKARIA GPS

Obama's Foreign Policy Examined

Aired December 28, 2008 - 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: Welcome to GPS, the GLOBAL PUBLIC SQUARE, to our viewers in the United States and around the world. I'm Fareed Zakaria.
We have a wonderful program for you today.

With just weeks until President-elect Obama becomes President Obama, the speculation is ramping up. What can we expect from his foreign policy? What will he do about Iraq, Afghanistan, Russia, China? How do we restore America's image in the world?

I think it's instructive to go back and listen to what he has actually said. I had the chance to sit down with then-Candidate Obama in July in Dayton, Ohio. And we had a wide-ranging discussion about the world -- how he thinks about it, and how he would deal with it as president.

It was, we think, perhaps the longest TV interview Obama did on any subject during the campaign, and the only wide-ranging foreign policy interview he gave on TV the entire time.

I'll highlight for you at the start something he said that I think has turned out to be revealing.

(BEGIN VIDEO CLIP)

BARACK OBAMA, DEMOCRATIC PRESIDENTIAL CANDIDATE: One of the things that I want to do, if I have the honor of being president, is to try to bring back the kind of foreign policy that characterized the Truman administration with Marshall and Acheson and Kennan, but also characterized, to a large degree, the first President Bush with people like Scowcroft and Powell and Baker, who I think had a fairly clear- eyed view of how the world works and recognized that it is always in our interests to engage, to listen, to build alliances, to understand what our interests are, and to be fierce in protecting those interests, but to make sure that we understand it's very difficult for us to -- as powerful as we are -- to deal with all these issues by ourselves.

We need to show leadership through consensus and through pulling people together wherever we can. There are going to be times where we have to act unilaterally to protect our interests. And I always reserve the right to do that, should I be commander in chief.

(END VIDEO CLIP) ZAKARIA: Now, many of wondered whether Obama was being honest about his respect for George Herbert Walker Bush's diplomacy. But consider his appointments -- James Jones as national security adviser, Robert Gates as secretary of defense. He's consulted with people like Brent Scowcroft and Colin Powell -- all Bush hands.

Obama's diplomacy may end up resembling Bush senior's much more than Bush junior's ever did.

Anyway, stay with us for the whole interview.

(BEGIN VIDEO)

ZAKARIA: Senator Obama, thank you for doing this.

SEN. BARACK OBAMA, D-ILLINOIS, DEMOCRATIC PRESIDENTIAL CANDIDATE: Thank you so much for having me.

ZAKARIA: Tell me, what is your first memory of a foreign policy event that shaped you, shaped your life?

OBAMA: A first memory. Well, you know, it wasn't so much an event. I mean, my first memory was my mother coming to me and saying, "I've remarried this man from Indonesia, and we're moving to Jakarta on the other side of the world."

And that's, I think, my first memory of understanding how big the world was. And then, flying there and landing. This was only maybe a year, or even less than a year, after an enormous coup, the military coup in which we learned later that over half-a-million people had probably died.

But it was for me, as a young boy, a magical place. And I think that probably is when it first enters into my consciousness that this is a big world. There are a lot of countries, a lot of cultures. It's a complicated place.

ZAKARIA: But you were an American in Indonesia. How did that make you feel?

OBAMA: Well, you know, it made me realize what an enormous privilege it is to be an American. I mean, it certainly was at that time, even more so, because the gap in the wealth of the West at the time compared to the East was much wider.

But it wasn't simply the fact that my mother was being paid in dollars by the U.S. embassy, and so, that gave us some additional comfort.

It was also becoming aware that, for example, the generals in Indonesia, or the members of Suharto's family, were living in lavish mansions, and the sense that government wasn't always working for the people, but was working for insiders -- not that that didn't happen in the United States, but at least the sense that there was a civil society and rules of law that had to be abided by. My stepfather was essentially dragged out of the university he'd been studying in in Hawaii, and was conscripted and sent to New Guinea. And when he was first conscripted, he didn't know whether he was going to be jailed, killed -- that sense of arbitrariness of government power.

Those were the things that you felt you were protected from as an American, and made me, as I got older, appreciate America that much more.

ZAKARIA: Then you get to Columbia, and you decide to major in international affairs.

OBAMA: Right.

ZAKARIA: Now, this is at the end of the Cold War -- what we now know as the end of the Cold War -- the Reagan years ...

OBAMA: Right.

ZAKARIA: ... just before Reagan and during.

What were you thinking then? Why did you major in international affairs?

OBAMA: Well, obviously, having lived overseas and having lived in Hawaii, having a mother who was a specialist in international development, who worked -- was one of the early practitioners of microfinancing, and would go to villages in South Asia and Africa and Southeast Asia, helping women buy a loom or a sewing machine or a milk cow, to be able to enter into the economy. It was natural for me, I think, to be interested in international affairs.

The Vietnam War had drawn to a close when I was fairly young. And so, that wasn't formative for me in the way it was, I think, for an earlier generation.

The Cold War, though, still loomed large. And I thought that both my interest in what was then called the Third World and development there, as well as my interest in issues like nuclear proliferation and policy, that I thought that I might end up going into some sort of international work at some point in my life.

ZAKARIA: There was one other issue that now looms large that you were introduced to very early, which was Islam.

OBAMA: Yes.

ZAKARIA: Do you believe, when looking at the world today, that Islamic extremism is the transcendent challenge of the 21st century?

OBAMA: I think the problems of terrorism and groups that are resisting modernity, whether because of their ethnic identities or religious identities, and the fact that they can be driven into extremist ideologies, is one of the severe threats that we face.

I don't think it's the only threat that we face. These ...

ZAKARIA: But how do you view the problem within Islam? As somebody who saw it in Indonesia ...

OBAMA: Right.

ZAKARIA: ... the largest Muslim country in the world?

OBAMA: Well, it was interesting. When I lived in Indonesia -- this would be '67, '68, late '60s, early '70s -- Indonesia was never the same culture as the Arab Middle East. The brand of Islam was always different.

But around the world, there was no -- there was not the sense that Islam was inherently opposed to the West, or inherently opposed to modern life, or inherently opposed to universal traditions, like rule of law.

And now in Indonesia, you see some of those extremist elements. And what's interesting is, you can see some correlation between the economic crash during the Asian financial crisis, where about a third of Indonesia's GDP was wiped out, and the acceleration of these Islamic extremist forces.

It isn't to say that there is a direct correlation. But what is absolutely true is that there has been a shift in Islam that I believe is connected to the failures of governments, and the failures of the West to work with many of these countries, in order to make sure that opportunities are there, that there's bottom-up economic growth.

You know, the way we have to approach, I think, this problem of Islamic extremism, which is real and there, is we have to hunt down those who would resort to violence to move their agenda, their ideology forward. We should be going after al Qaeda, and those networks, fiercely and effectively.

But what we also want to do is to shrink the pool of potential recruits. And that involves engaging the Islamic world rather than vilifying it, and making sure that we understand that, not only are those in Islam who would resort to violence a tiny fraction of the Islamic world, but that also, the Islamic world itself is diverse, and that lumping together Shia extremists with Sunni extremists, assuming that Persian culture is the same as Arab culture -- that those kinds of errors in lumping Islam together result in us not only being less effective in hunting down and isolating terrorists, but also in alienating what need to be our long-term allies on a whole host of issues.

ZAKARIA: If U.S. forces in Afghanistan captured Osama bin Laden, what would you do with him, and you were president?

OBAMA: Well, I think that, if he was captured alive, then we would make a decision to bring the full weight of not only U.S. justice, but world justice down on him. And I think that -- and I've said this before, that I am not a cheerleader for the death penalty. I think it has to be reserved for only the most heinous crimes. But I certainly think plotting and engineering the death of 3,000 Americans justifies such an approach.

Now, I think this is a big hypothetical, though. Let's catch him first. And the fact that we have failed to seriously go after al Qaeda over the last five years, because of the distraction of Iraq, I think we are now seeing the consequences of that in Afghanistan.

That's not the only problem we have in Afghanistan. We have not dealt with the narco-trafficking that's taking place there. We have not provided farmers there an option beyond poppy. I think the Karzai government has not gotten out of the bunker and helped to organize Afghanistan and government, the judiciary, police forces, in ways that would give people confidence. So, there are a lot of problems there.

But a big chunk of the issue is that we allowed the Taliban and al Qaeda to regenerate itself when we had them on the ropes. That was a big mistake, and it's one I'm going to correct when I'm president.

ZAKARIA: We'll be right back.

(COMMERCIAL BREAK)

ZAKARIA: And we're back.

You talked about the other threats we face. In dealing with these threats, how should we approach other nations?

John McCain has talked about a new G-8, the group of the richest countries in the world, which would exclude Russia, expel Russia, and not include China. So, it would be an attempt to draw a line in the sand and cast out, as it were, the non-democracies.

Do you think that's a good idea?

OBAMA: It would be a mistake.

Look. If we're going to do something about nuclear proliferation -- just to take one issue that I think is as important as any on the list -- we've got to have Russia involved. The amount of loose nuclear material that's floating around in the former Soviet Union, the amount of technical know-how that is in countries that used to be behind the Iron Curtain -- without Russia's cooperation, our efforts on that front will be greatly weakened.

China is going to be one of the dominant economies -- already is -- and will continue to grow at an extraordinary pace. The notion that we don't want to be engaged in a serious way with China, or that we would want to exclude them from the process of creating international rules of the road that are able to maintain order in the financial markets, that are able to address critical issues like terrorism, that are able to focus our attention on disparities of wealth between countries -- that does not make sense.

Now, I think that we have to have a clear sense of what our values are and what our ideals are. I don't think that we should shy away from being straight with the Russians about human rights violations. We should not shy away from talking to the Chinese about those same subjects.

I think that we have to be tough negotiators with them when it comes to critical issues. For example, if China is not working cooperatively with us on trade issues, I think that there's nothing wrong with us being tough bargainers.

But we have to engage and get them involved and bought-in into dealing with some of these transnational problems. And that kind of tough, thoughtful, realistic diplomacy used to be a bipartisan hallmark of U.S. foreign policy.

And one of the things that I want to do, if I have the honor of being president, is to try to bring back the kind of foreign policy that characterized the Truman administration with Marshall and Acheson and Kennan, but also characterized, to a large degree, the first President Bush with people like Scowcroft and Powell and Baker, who I think had a fairly clear-eyed view of how the world works and recognized that it is always in our interests to engage, to listen, to build alliances, to understand what our interests are, and to be fierce in protecting those interests, but to make sure that we understand it's very difficult for us to -- as powerful as we are -- to deal with all these issues by ourselves.

We need to show leadership through consensus and through pulling people together wherever we can. There are going to be times where we have to act unilaterally to protect our interests. And I always reserve the right to do that, should I be commander-in-chief.

ZAKARIA: What about if you don't get that consensus, let's say, in a place like Darfur? You've called for a no-fly zone. But it's a U.N. no-fly zone.

OBAMA: Right.

ZAKARIA: Now, but the U.N. isn't going to have a no-fly zone, probably, because the Chinese and the Russians will probably not go along with it.

So, in that event, do you want to have a U.S. or a NATO no-fly zone? In other words, do you want to do something, even if you can't get consensus?

OBAMA: Well, look. There are going to be times where it's the right thing to do, and the consensus is not going to be perfect.

I think our intervention in the Balkans, ultimately, was the right thing to do, although we never got the sort of formal consensus and coalition that we were able to achieve, for example, in the Gulf War. And so, the situations are going to vary.

My point is this, that we should always strive to create genuine coalitions -- not coalitions that are based on us twisting arms, withholding goodies, ignoring legitimate concerns of other countries, but coalitions that are based on a set of mutual self-interests. In a situation like Darfur, I think that the world has a self- interest in ensuring that genocide is not taking place on our watch -- not only because of the moral and ethical implications, but also because chaos in Sudan ends up spilling over into Chad. It ends up spilling over into other parts of Africa, can end up being repositories of terrorist activity.

Those are all things that we've got to pay attention to. And if we have enough nations that are willing -- particularly African nations, and not just Western nations -- that are willing to intercede in an effective, coherent way, then I think that we need to act, even if we haven't achieved 100 percent consensus.

But the principle of us wanting to build effective alliances with other countries and to lead in that way through persuasion and organization, I think that's something that has historically been when we are at our best.

ZAKARIA: One area where you're outside the international consensus -- and certainly, perhaps, some others -- is the statement you made in a recent speech supporting Jerusalem as the undivided capital of Israel.

Now, why not support the Clinton plan, which envisions a divided Jerusalem, the Arab half being the capital of a Palestinian state, the Jewish half being the capital of the Jewish state?

OBAMA: You know, the truth is that this was an example where we had some poor phrasing in the speech. And we immediately tried to correct the interpretation that was given.

The point we were simply making was, is that we don't want barbed wire running through Jerusalem, similar to the way it was prior to the '67 War, that it is possible for us to create a Jerusalem that is cohesive and coherent.

I was not trying to predetermine what are essentially final status issues. I think the Clinton formulation provides a starting point for discussions between the parties. And it is an example of us making sure that we are careful in terms of our syntax.

But the intention was never to move away from that basic, core idea that they, that those parties, are going to have to negotiate these issues on their own -- with the strong engagement of the United States.

And if you look at the overall tenor of that speech and what I've said historically about this issue, Israel has an interest not just in bunkering down. They've got to recognize that their long-term viability as a Jewish state is going to depend on their ability to create peace with their neighbors.

The Palestinian leadership has to acknowledge that the battles that they've been fighting, and the direction that they've been going in and the rhetoric they've been employing, has not delivered for their people. And it is very hard, given the history of that region and the sense of grievance on both sides, to step back and say, let's be practical and figure out what works.

But I think that's what the people of Israel and the people in the West Bank and Gaza are desperate for, is just some practical, commonsense approaches that would result in them feeling safe, secure and able to live their lives and educate their children.

ZAKARIA: And we will be right back.

(COMMERCIAL BREAK)

ZAKARIA: And we're back with Senator Obama.

You've also said that the chief beneficiary of the Iraq war has been Iran, which now poses a significant strategic threat to -- or challenge to -- the United States in the region.

If we were to leave Iraq entirely, would that not cede the field to them and allow Iran to consolidate its gains in the region and in the country?

OBAMA: I don't think so. Look. The -- first of all, I have never talked about leaving the field entirely. What I've said is that we would get our combat troops out of Iraq, that we would not have permanent bases in Iraq.

I've talked about maintaining a residual force there to ensure that al Qaeda does not re-form in Iraq, that we're making sure that we are providing logistical support and potential training to Iraqi forces -- so long as we're not training sectarian armies that are then fighting each other -- to protect our diplomats, to protect humanitarian efforts in the region.

So, nobody's talking about abandoning the field.

ZAKARIA: That might be a large force.

OBAMA: Well, it -- you know, I'm going to make sure that we determine, based on conditions on the ground, how we effectively carry out those limited, temporary missions.

But what is going to prevent Iran from having significant influence inside of Iraq -- or at least, so much influence that Iraq is not functioning -- is to make sure that the government has stood up, that it has capacity, that the Shia, the Sunni, the Kurds have come to the sort of political accommodation that allows them to divide oil revenues that are now coming in quite handsomely, that ensures that, in fact, we're serious about ending corruption in some of the ministries, that provincial federalist approaches to governance are being observed.

The stronger the Iraqi government is on its own -- not with us, but on its own -- the less likely that Iran is going to exert its influence. And again, this is -- you know this better than I do, Fareed -- the assumption that, because many in Iraq are Shia, that they automatically are going to align themselves with Iran, ignores the fact that you've got Arab and Persian cultures that are very different. And if Iraqi Shias feel that their government is actually functioning, then I think their identity as Iraqis reasserts itself.

If, on the other hand, the perception is that the government in Iraq is just an extension of the U.S. government, then sympathies for the kind of mischief that Iran has been engaged in may increase.

Now, the last point I would make on this is, this is going to be a messy affair. There's no elegant and easy solutions to what I believe has been an enormous strategic blunder by this administration.

We're going to have to work our way through it. There are going to be -- there's going to be progress in some areas, there is going to be slippage in others.

What we do have to make certain of is that, by creating a phased withdrawal in Iraq, that we are mounting the sort of diplomacy and reaching out to our allies in ways that actually strengthen our ability to isolate Iran, if it continues to pursue what are unacceptable foreign policy decisions by their leadership.

ZAKARIA: But you could imagine a situation where, if the Iraqi government wanted it, 30,000 American troops are still in Iraq 10 years from now?

OBAMA: You know, I have been very careful not to put numbers on what a residual force would look like. What I am absolutely convinced of is that, to maintain permanent bases, to have ongoing combat forces, to have an open-ended commitment of the sort that John McCain and George Bush have advocated, is a mistake. It is a strategic mistake.

It weakens our ability to go after al Qaeda in Afghanistan. It continues to fan anti-American sentiment. I think it allows Iran to more effectively engage in mischief in the region. And it prevents us from isolating them and making clear to the world that they are the authors of their own isolation by their behavior.

Those costs cannot be borne. And that's before we even start talking about the hundreds of billions of dollars and American lives that are lost or profoundly disrupted as a consequence of this engagement.

ZAKARIA: And we will be right back.

(COMMERCIAL BREAK)

ZAKARIA: A final question.

You're going to Europe and the Middle East. You know that in places like France you have 85 percent approval ratings. Isn't that going to make some Americans very suspicious? If all of Europe likes you, if France likes you, there must be something wrong.

OBAMA: Well, I tell you what. You know, it's interesting. As I travel around the country, here in the United States, I think people understand that there has been a price to the diminished regard with which the world holds the United States over the last several years.

It's something that bothers people. It's something that's brought up. You know, when I'm doing a town hall meeting in some small, rural community, invariably somebody will raise their hand, and they'll say, "When are we going to restore the respect that the world had for America?"

And, you know, the American people's instincts are good. It's not just a matter of wanting to be liked. It's the fact that, as a consequence of that diminished standing, we have less leverage on a whole host of critical issues that have to be dealt with.

So, I think the American people are ready for a president who is not alienating the world. And if that president is liked a little bit, well, that's just a bonus.

Now, I don't know how long that will last. We'll see if my approval ratings hold up after I'm president.

ZAKARIA: You're bound to disappoint people. I mean, with approval ratings that high, it's bound to be a let-down, don't you think?

OBAMA: You know, my job is to make sure that, here in the United States, the American people feel confident that I'm going to be advocating for their interests, that I'm going to keep them safe.

The way to do that though, I believe, is to make sure that we're paying attention to the rest of the world, their hopes, their aspirations, as well, and that we're leading with our values and ideals, and not just with our military.

ZAKARIA: Senator Obama, thank you.

(END VIDEO)

(COMMERCIAL BREAK)

ZAKARIA: One of the great dangers during financial and economic downturns is that governments move towards protectionist trade policies. That is what infamously happened in the 1930s. Will it happen this time?

To answer this question and many more around economics and financial issues, I have gathered experts on international economics. They don't always agree with one another, but they are all distinguished.

Joining me, Joseph Stiglitz, a Nobel Prize winner in economics, currently a professor at Columbia University.

Jagdish Bhagwati, also a professor at Columbia University and an extremely distinguished economist on trade. His new book is "Termites in the Trading System."

Hernando de Soto is best known for his work on property rights as a tool to alleviate poverty. Bill Clinton has said he's the world's greatest living economist. In this crowd, I'm not going to endorse or not endorse that statement.

(LAUGHTER)

And we are deeply honored to have the United States secretary of commerce, Carlos Gutierrez. Prior to his appointment with the Department of Commerce, he rose in the ranks at Kellogg's, the cereal maker, working his way up from sales representative to CEO.

Thank you all.

Mr. Secretary, the G-20 summit -- what I was struck by was that many emerging market countries were worried about protectionism in the West. You heard the Indians, the Brazilians all say, for God's sakes, don't respond to this crisis by closing down trade.

Is it your sense that that's a real danger in the United States?

CARLOS GUTIERREZ, U.S. SECRETARY OF COMMERCE: Sure. And I find that to be one of the great ironies, is that it's the emerging markets and developing markets coming to the U.S. to remind us, please do not go protectionist. We've been spending, you know, decades trying to convince the rest of the world not to go protectionist. And now, it's quite interesting.

But, yes. I thought it was very telling and very important that the G-20 came out with a statement saying, "We reject protectionism."

ZAKARIA: But, now, what would happen if you were to hold a similar meeting at the United States Congress, and people were to talk about these issues?

GUTIERREZ: Well, I think part of the message was directed toward the U.S. Congress. And this is one of, I think, the key economic issues of our time. And we all remember Smoot-Hawley. We all remember what that got us into.

And, you know, the irony is, we don't do a lot in terms of free trade agreements. We actually have very few free trade agreements compared to countries like Chile, compared to the European Union, compared with China. And we have to realize that, not only are we not moving forward, we're actually standing still, which in this day and age, is essentially going back, because the rest of the world is moving forward.

This could be a major impact on our competitiveness -- not next year, but five, 10 years from now. ZAKARIA: Joe, you are probably the most distinguished economist, who has written stuff that would -- people would say -- give credence to arguments about protectionism. You've written things that basically suggest free trade is not working, that it's not working for the average American worker.

How do you look at this?

JOSEPH STIGLITZ, NOBEL PRIZE-WINNING ECONOMIST, COLUMBIA UNIVERSITY: Well, first let me say that free trade agreements are not free trade agreements. That's just their name. They're really managed trade agreements, and, for the most part, managed for special interests in the United States -- sometimes special interests in developing countries.

One of the things, I think, is that we need to have social protection without protectionism. One of the problems is that we've taken away some of the social protections. And if we can provide the social protection without protectionism, I think that is the way going forward.

Now, one of the interesting things is that, without thinking about it, some of these free trade agreements have really tied our hands. For instance, let me give you an example.

The financial service agreement part of the WTO basically commits all the countries not to impose more regulation in the financial sector. When the G-20 leaders got together, they all agreed that we need to have stronger regulations.

The problem that has -- you know, one of the reasons that we've gotten ourselves in a mess is inadequate regulations.

They had signed on an agreement -- the so-called free trade agreement -- that actually circumscribes their ability to deal with the problem today.

ZAKARIA: Jagdish, do you agree?

JAGDISH BHAGWATI, PROFESSOR OF ECONOMICS, COLUMBIA UNIVERSITY: Not fully at all. There's no evidence in my view, and that of many other people working on it, that really lower standards of labor or domestic protection of ...

ZAKARIA: Environmental ...

BHAGWATI: ... environmental issues, and so on, are really driving down the wages of our workers. So, that's the first economic proposition.

ZAKARIA: So, what is driving down the wages of our workers?

BHAGWATI: It is very rapid technical change, which is laying off entire assembly lines. Like if you go and see "Modern Times" with Charlie Chaplin -- you know, your son wants you to show an assembly line -- he will be able to show an assembly line, but there will be no Charlie Chaplins there, because there'll be five people in a glass cage who are managing the assembly line, which is robotized.

I think you get continuous layoffs, which are dramatic and spectacular, which you read about in the newspapers. And, too, I think it's a rich, rich country for competition like Boeing and Airbus. That is so common now.

And I think where China and India, for instance are beginning to crowd us a bit, is, as they accumulate skills, they're becoming, at the margin, more like the European countries and Japan. That is leading to also a sense of fragility of jobs. And that's where it's all coming from.

So, I think, if we want to address these issues, get off this worrying about raising standards in the poor countries, and so on. Leave them alone, and instead concentrate on creating what Joe called, I think, social protection -- meaning, address the issue of the anxiety, the ability of people to shift from job to job, to make transitions to new types of skills -- a variety of things like that.

ZAKARIA: Hernando, how does this all strike you, this debate about trade?

HERNANDO DE SOTO, PRESIDENT, INSTITUTE FOR LIBERTY AND DEMOCRACY: Well, what is happening now, because I can't see anything outside the recession that we are facing today, is that, from my point of view, what we're seeing is that the real economy has a lot to do with trade, and has a lot to do with cooperation.

Seen from a Third World point of view, the interesting thing is that, as trust breaks down in Western societies, the United States -- among other things, because nobody really knows who owns what assets and what liabilities -- this is why banks have stopped lending to each other.

You're starting to find out that the real economy has a lot to do with trust, more than with the so-called fundamentals. That when people are not able to identify each other, when they don't know what rights they have over what property or liabilities, then you don't get cooperation. And trade adds itself to that.

If you bring up trade restrictions, if you increase them, what you're going to do is break down more and more that international cooperation, which has given us over the last 60 years more growth than we've had over the previous 2,000 years.

We have to go back to open trade. We've got to go at -- understand that we cannot micromanage something which we don't have enough knowledge about. I mean, right now at this moment, the reason banks don't trust each other is because nobody knows who's got the toxic paper.

I mean, Fareed, we don't know who's got the toxic paper. You know that there are buildings behind bad paper. We don't know which are the buildings that debts are not being paid on. We've lost track.

And we've lost track, because instead of having universal documentation as to who owns what -- which is what international cooperation would give us -- today, you've got that most of the paper in the world is untrackable.

BHAGWATI: I think the -- in each of these financial crises that we have had, the new instruments and changes have usually gone way beyond comprehension. And I think that's really at the heart of financial innovation.

DE SOTO: It's about transparency.

BHAGWATI: The downside is really important. So, when we say we must regulate, the regulators must first understand what's to be regulated.

STIGLITZ: I think the point that Jagdish made is exactly right, that much of the innovation that we've had in the financial sector in the last two decades has been of negative value. It has been creating complexity.

It's not a question of disclosure. You could disclose these documents, but nobody -- the buyer, the seller, the regulators can't understand them.

And it was done deliberately. It was done deliberately, so people couldn't understand what was going on.

ZAKARIA: But you worry about the response to this. I saw a statement you made that you worry that we're now going to over- regulate.

GUTIERREZ: Sure. And I think that's usually an inclination to over-regulate when you have a problem like this, and to, you know, to solve the wrong problem, which I think -- when you have a problem of the complexity that we have today, the challenge is, pick the right problem, solve the right problem, pick your priorities well.

My concern is that we'll overdo it, and we'll realize that we're creating an obstacle to growth by creating regulations that aren't necessary.

STIGLITZ: But actually, we've understood these problems for a long time. I wrote 20 years ago about the risk that this kind of securitization would lead to.

We know that, if you have ...

ZAKARIA: But is the answer more regulation?

STIGLITZ: The question is, what kind of regulation. It's not more or less. It's the right kind of regulation.

We need, for instance, to make sure the incentive structures do not encourage short-sighted, excessive risk-taking.

Back in the time of the Enron, WorldCom scandal, we all recognized that one of the problems was the stock options, which give incentives for bad accounting. And, you know, as an economist, we understand incentives work. In this case, they worked to undermine the economy.

We didn't change that. And as a result of that, we got more bad accounting.

DE SOTO: Where you have to point towards regulation control is not to stifle the economy, as Secretary Gutierrez rightfully points out is a danger. Control means to find out who owns what at this moment.

The reason you are in paralysis, the reason you are collapsing, is because you no longer know who's got whose hand in whose pockets. And you've got to make a distinction. And remember that financing is there at the service of production, in combination, and is not center stage.

ZAKARIA: But let me ask you, Joe. President Obama comes into office. Do you want him to do things on trade that respond to some of the demands of the labor unions, environmental groups, you know, in terms of trader deals?

STIGLITZ: Well, it depends on which -- the things that are listed. For instance, I think global warming is a very serious problem. We have, right now, no effective way of enforcing it on countries that don't comply.

And the WTO has said that, in the case of global environmental issues -- a famous case, the Thai shrimp-turtle case -- that you can do it, if you do it in the right way.

ZAKARIA: So, basically what you're saying is, if you don't agree to certain environmental standards, we'll keep your goods out of the American market.

STIGLITZ: Well, not necessarily -- or ...

ZAKARIA: I mean, that's the basic ...

STIGLITZ: ... basic, or we'll try to create a level playing field, so you don't have a competitive advantage, as we try to do something about this global problem.

GUTIERREZ: We shouldn't ascribe ever problem to trade. You know, global warming is not a reason to stop trade. And, you know, if people want to stop trade, you can always find a reason for it.

ZAKARIA: And we will be watching that. Thank you all for a fascinating discussion. And we will be back.

(COMMERCIAL BREAK)

ZAKARIA: That's it for this week. Once again, no question of the week. I'm asking all viewers to hold those opinions for the rest of the year, when I'll have lots of challenging questions. But I do want to recommend a book. It's a new one by the Nobel Prize-winning economist, Paul Krugman, who has been a frequent guest on this show.

It's called "The Return of Depression Economics and the Crisis of 2008." It's about how the failure of regulation set us up for 1930s style problems. It's a depressing book, but it will make you smarter. So, you'll be depressed and smart, which is at least better than being just depressed.

Remember, as always, you can visit our Web site, cnn.com/gps, for highlights from this program, our weekly podcast and some conversations that are exclusive to the Web site. And you can also e- mail me at fareedzakariagps@cnn.com.

Thanks, and have a great week.

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