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FAREED ZAKARIA GPS

Solving Europe's Core Problem; Time to Get Preoccupied with the Economy; Interview with Prince Turki Al-Faisal

Aired October 16, 2011 - 10:00   ET

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


FAREED ZAKARIA, HOST: 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've got a great show for you today. First up, a terrific panel including Paul Krugman and Steve Forbes to talk about Occupy Wall Street, Democrats and Republicans, and other topics on which they will disagree.

Then, how your cell phone could solve the food crisis. I'll explain.

Next, one of the most powerful men from one of the most complex countries, the former head of Saudi intelligence, Prince Turki al- Faisal, talks about the Osama Bin Laden he knew, and much more.

Finally, how this man became this man - the most wanted man in the world. An unbelievable story.

First, here's my take. I was in Germany this week, and the mood there is pretty grim. Europe is facing its most severe challenge since 1945. If the Greek crisis morphs into an Italian crisis, Italy being too large to bail out, the entire structure of post-World War II Europe could unravel.

Finally, European leaders seem to recognize that their strategy of kicking the can down the road has not worked, and they will come up with some package. The result will not be a dramatic solution, that is not how Europe works, but more likely a series of steps that together will be more comprehensive than anything done before.

But they will not address Europe's core problem, which is a lack of growth. The Europeans, by which I mean the Germans, are trying to find some solution to the crisis that will not let countries like Greece and Italy off the hook. Germans feel these countries need to feel the pressure. Only then will they reform their budgets and their habits. So the solutions will be complex, trying to stop a crisis while not bailing out these countries entirely.

The real problem, however, is not so much that Greece has been unwilling to make sacrifices. It has made many. But Greece's budget numbers look bleak because its growth forecast looks bleak. It needs to address a much larger question of competitiveness. What can the Greek economy do to attract capital and investment, and at what wage levels?

These are the questions most European countries will need to answer to fully solve their problems. Italy's economy has not grown for an entire decade. No debt deal will work if Italy stays stagnant for another decade.

Even Germany is not immune. It has an average growth rate of about 1.5 percent, and German officials know that with a declining population in five to seven years, the country could grow at an annual rate of just one percent. That's not much of an engine for Europe.

Europe needs a crisis agenda to get out of its bind. But, beyond that, it needs a growth agenda which might in the short term require investments but, in the long run, requires radical reform.

The fact is that western economies, with high wages, generous middle-class subsidies, complex regulations and taxes have become sclerotic. Now they face pressure from three fronts - demography, an aging population; technology, which has allowed companies to do much more with fewer people; and globalization, which has allowed manufacturing and services to locate across the world. If Europe, and for that matter the United States, cannot adjust to this new landscape, it might escape this storm only to enter another.

Let's get started.

(BEGIN VIDEOTAPE)

ZAKARIA: Occupy Wall Street and the Tea Party come from diametrically opposite ends of the political spectrum, but they both stem from that great old American tradition of populism. What are these movements about? What will come of them?

I've got a great panel to talk about just that and much, much more.

Steve Forbes is chairman and editor-in-chief of "Forbes Media" and ran for president in 1996 and 2000. Nobel prize-winning economist Paul Krugman is a columnist for "The New York Times." Bret Stephens is the deputy editorial page editor for the "Wall Street Journal." And Chrystia Freeland is global editor-at-large at "Reuters."

So, Paul, you have been counseling us to take these guys seriously, not just in terms of the political power but actually in terms of a coherent message.

PAUL KRUGMAN, COLUMNIST, NEW YORK TIMES: Yes. We had - I mean, we are just three years after the greatest banking crisis since - since the 1930s, and it was brought on by excesses on the part of the financial industry, and the financial industry was bailed out at the public's expense and risk. And yet we're still in an economic crisis.

And somehow, all of that, the discussion of who are these guys, why are we supporting them, why haven't they paid more for this, what are the reforms that's going to stop this from happen again, all of that disappeared from the debate. We're been arguing about who's going to cut social - social security and - and what about that budget deficit, and we lost the whole thread of the - the core issue at our - in our society right now.

And these protesters, who are a mix of all sorts of people, suddenly brought that back into the center of our - of our national debate. And, just for that, that's an enormously positive contribution.

ZAKARIA: Do you think that the - the crisis was caused by the irresponsibility of the private sector?

STEVE FORBES, CHAIRMAN AND EDITOR IN CHIEF, FORBES MEDIA: I think the crisis, and this is where I wish the protesters would go against the Fed instead of Wall Street. If the Federal Reserve hadn't been on such an easy money path in the early part of the last decade, which dragged the central banks with it, you'd not - would not have had a housing boom and bust. The juice would not have been there for it.

So you get monetary policy right, and a lot of the excesses you see as a result of that would have gone away, whether it's artificial winners like Wall Street and commodities, or artificial losers in other sectors of the economy. It's very, very disruptive when you deliberately weaken a currency.

ZAKARIA: What do you say to that, that - that the government regulation, principally the Fed's decision for easy money, was the - was the root cause?

KRUGMAN: You have a hard time, and there - there are so many levels in that. But, you know, first of all, I think that this is a - a really kind of desperate effort to - to change the subject, right?

We know about the bankers. We know about how much money we need. We know about the - the packaging of seemingly - of what were in fact bad loans as AAA assets, which suddenly turns into toxic waste. And now, all of a sudden, you're saying that it was Alan Greenspan doing it.

Well, you know, I'm no fan of Greenspan's, but, you know, a financial system that depends on always having the perfect leadership at the central bank is a financial system that is doomed to failure. Monetary policy is always less than optimal.

What we had was a financial system that, thanks to deregulation, thanks to financial developments that had bypassed the existing regulations, was far more fragile than it used to be, far more prone to abuse. And those are the abuses we need to - to have a reckoning about.

BRET STEPHENS, WALL STREET JOURNAL: Well, the crisis also has a lot to do with the political allocation of capital, thanks to Fannie Mae and Freddie Mac and various government interventions on behalf of various kinds of not only lenders but borrowers.

But I want to just push back on another point. Before you sort of make - assert the premise that this is a populist movement that's taking place on Wall Street, I lived down there. I don't know if any of you have actually gone to Zuccotti Park and chatted with - with some of these guys.

This is not populism, this is maybe anarchism or something entirely - entirely different, but what you don't find down there is sort of really a populist movement. You find sort of 9/11 truthers, you find people - by the way, take down the Fed is one of the - is one of the slogans of - of some of these people.

(CROSSTALK)

STEPHENS: And I wonder - I wonder about the wisdom of the Democratic Party or its partisans tying their carriage to this particular movement, because it doesn't strike me as representing anyone except the same kind of extreme fringe that you find at, you know, Ramsey Clark marches.

CHRYSTIA FREELAND, GLOBAL EDITOR-AT-LARGE, REUTERS: I would - I would -

ZAKARIA: You were there, as well?

FREELAND: Yes. I've been there. It's - it's not that hard. It's not brave reporting to take the subway down.

But I - I would totally disagree with Bret. I do think that the Occupy Wall Street movement, like the Tea Party, is a genuine grassroots expression of people being really angry, people being angry about the fact that median wages are stagnating in the United States, and they don't see economic growth. People are worried about their jobs, they are losing their houses, and, you know, I think there is no consensus whatsoever on the political solution.

But this is - this is real anger.

FORBES: So far they haven't had the volume the Tea Party's had, and there - like what - about the Tea Parties is they went to what they considered the real source of the problem, which was Washington, D.C.

And just to get one last thing on the Fed, it is the most boring subject in the world, and I don't want to erode your ratings. But the bottom line is you could not have had a housing boom of this scale you had if you hadn't had that easy money.

We saw this in the 1970s. Again, you know, excess oil profits and the like; huge, spectacular busts afterwards. Again, the Fed's got to get it right.

And I think Bret is right. If you didn't have Fannie and Freddie, $1.5 trillion of - guaranteed of junk paper, it could not have reached the scale that it did.

(CROSSTALK)

FREELAND: But isn't the core - isn't the core problem actually financial regulation?

FORBES: But let's - let's start with the root causes and then take it from there.

KRUGMAN: Except this is - I mean, this is why people like me welcome this so much, because there's been this concerted effort to hijack a massive case of private sector failure, a massive case of the failure of deregulation and turn it into somehow an anti-government case, which is what you guys are doing, and it's all wrong. I mean, and that's - that's another program. We'd have to go through this (INAUDIBLE).

But the - the point of view that says, hey, wait, let's go after the actual bad guys who are not in Washington. No, Barney Frank somehow, as a - as a member of a minority party under the iron thumb of Tom DeLay did not somehow cause this financial crisis. To say, look, these - the bankers are the ones who profited and then left the rest of us in a ditch.

That's a very good thing to have people saying that.

(CROSSTALK)

FREELAND: But isn't it the end actually that the bankers were able to do that because the rules of the game were wrong? I mean, it's not that the guys who work on Wall Street are evil individuals. They're not more evil than the guys who work on Bay Street in Toronto.

(CROSSTALK)

FREELAND: It's just that the rules were such that - you know, I would say particularly on leverage and on capital requirement that encouraged bad behavior. And the financial sector had an incentive to do things which ended up toppling the economy.

ZAKARIA: But let - but let me ask Steve this question, because it - you know, you're an old-fashioned executive, in a sense, not a financial executive, and surely you must look at what these financial executives were paid and the massive increases in pay that - that seemed disproportionate.

I mean, if you look at average financial executives compared with the average executive pay, it used to be two to one. It's not - I believe it became six to one by the - by the time of the crisis.

(CROSSTALK)

FORBES: Sure. And people -

ZAKARIA: And people can look at that and say, you know, what - what were they - what were they producing for the real economy? These weren't, you know, technology CEOs -

FORBES: Again, when - when you undermine a currency, you do get these artificial winners. You saw it in the '70s. Oil companies did extremely well and a handful of others did extremely well. You had a land boom in farmland and the like. You get these distortions.

Now, Joseph (INAUDIBLE) pointed out very well, after World War I, when Austria was hit by a great inflation, he said on every street corner there suddenly rose a bank instead of a coffee house. When the inflation was conquered a couple of years later, the banks went, the coffee houses came back.

If you have a stable currency, stable environment, those excesses just can't take place. The juice is not there for it.

STEPHENS: The - the - I mean, where there might be a real movement here is not, I don't think, with - with these guys downtown. I think it's - it's the problem of joblessness. You have youth unemployment that's 18 percent, you know, regular unemployment which refuses to come below nine - nine percent. I think the figure is five jobseekers for every - for every available job, and that's a real problem.

And you can do one of two things. You can march on, you know, Jamie Dimon's house or on - on JPMorgan, never mind that JPMorgan actually was one of the banks that didn't get itself into the - into the mortgage mess, or you can have some kind of serious discussion about what we have been doing over the last three years to create jobs.

You know, just now, this week, we're signing a free trade agreement with South Korea, Panama, and - and Colombia. The White House itself says that the Korean side of the deal is going to create 70,000 jobs. Why was this sitting there for three years when the treaty had already been - when the deal had already been negotiated under the previous administration?

UNIDENTIFIED MALE: Five years ago.

STEPHENS: You have to go to look at Washington and say, what are they doing to kill jobs and why aren't they creating?

KRUGMAN: I think this is -

(CROSSTALK)

ZAKARIA: All right. OK, we're going to take a break and we will come back and discuss job creators and job killers. Right back.

(COMMERCIAL BREAK)

ZAKARIA: And we are back Steve Forbes, Paul Krugman, Chrystia Freeland and Bret Stephens.

Paul, we were talking about creating or killing jobs. So the argument is that the administration hasn't done enough in terms of trade policy and things. But you obviously fundamentally think the thing to do to create jobs is spend government money.

KRUGMAN: Yes, I mean - and - and have more - actually more of exactly what Steve Forbes hates, which is more expansionary policy by the Fed, right?

I mean, this is - it's worth mentioning, you know, these numbers about - about South Korea, free trade pact and all that. First of all, those numbers are disputable, but the main thing is 70,000 jobs in the U.S. economy? You're talking about a rounding era on a rounding era.

These are not where the - the important stuff are going to come from. It has to come from a major increase in demand. And the only ways that we actually know will do that are an increase in government spending temporarily, or possibly some more aggressive action by the Fed, moving in exactly the opposite direction of the way that - that people like Steve want it to go.

This is - I mean, we are - we are recapitulating the Great Depression right now. We are making exactly the same mistakes of pulling back on stimulus too soon, tightening money too soon, that - that were what made the Great Depression go on for so long.

STEPHENS: Well, I think what we're recapitulating is the experience of Japan. I mean, you talked about more stimulus. We just had the greatest experiment in stimulus spending in a - a very long time in this country, about a trillion dollars' worth of stimulus, rounds of quantitative easing by the Federal Reserve, and what - you know, what are the results that we have - that we have to show for it? We have a - a worse than a jobless recovery -

ZAKARIA: But what would you -

(CROSSTALK)

ZAKARIA: -- you would regard as a success? Because I've never quite understood what that means because, clearly, I mean, it's mathematically true that by keeping schoolteachers in - in place and not firing them and not firing firefighters you preserve those jobs.

Do you mean that it didn't trigger a round of private sector hiring? Is that the idea, that it didn't jumpstart the economy? That government spending did keep -

FORBES: No, no. The whole - the whole notion that, you know, government by that way can jumpstart the economy is a false one. Where did they get that trillion dollars from? It does not come from heaven. What it comes from is either borrowing; printing money, which is a form of taxation; or taxation itself. So it removes resources from the private sector where it could be put to productive use and perpetuates a lot of things that should not be perpetuated.

Again, if you let the private sector -

ZAKARIA: The private sector - the private sector is saving right now because it - it has an overhang.

FORBES: It does because of the weak dollar, sending private capital overseas, uncertainty about the tax code, massive new regulations coming on health care and the financial sector. Those are real headwinds.

But the government - if President Obama had done nothing when he took office, he'd be a genius today.

(CROSSTALK)

KRUGMAN: Can I say that this is - this is, again, why we need an Occupy Wall Street because, you know, from my point of view - and I've said this many times - people like Steve are - are recapitulating 80- year-old economic fallacies, they're hijacking this whole discussion on the - on the eve of the greatest failure of those conservative policies that we can possibly imagine, somehow making the - the problem - the case that - that the problem was we weren't conservative enough.

But, because of the way our normal discussion is structured, because of who has access to - to megaphones, because of who ends up dominating debates in Congress, the other side which said, hey, wait, the problem is not that we're doing too much, we're not - the problem is that we're not doing enough, got practically squeezed out of the debate. And thank God a ragtag group of protesters down in Zuccotti Park and elsewhere, had made us go back to hey - saying hey, wait, you know, what - what is the problem here? Shouldn't - shouldn't we be doing more?

FORBES: What - what has massive government spending ever revived economy in peace time?

KRUGMAN: Why - why does a war make a difference?

What we do know is that cuts in government spending -

FORBES: Well, you said World War II was revived by government spending?

KRUGMAN: Yes.

FORBES: When 12 million veterans are taken out of the workforce, and after the war we cut spending -

KRUGMAN: Boy, do you really want to make this program about something else? You want to have the argument.

But, as - as I see it, actually, there's been a sustained set of economic research these past two years on the whole question of stimulus or austerity. Take the austerity, does cutting government spending actually have an expansionary effect? The International Monetary Fund has done a series of careful studies, and it's been overwhelming. The world works the way a Keynesian analysis says it should, not a -

(CROSSTALK)

ZAKARIA: But answer - answer Bret's question about Japan, because Japan did have a massive round of infrastructure spending -

(CROSSTALK)

KRUGMAN: They actually - they dribbled it out. They dribbled it out in - in stages. If you actually look at the - at the, you know, year by year, you discover that the years when Japan ramped up the spending, their economy started to grow. Then they pulled back, and the economy sank again.

The actual - if you - if you go through the actual history, sort of run the tape on Japan, what you find is a strong confirmation that actually increases in government spending do lead to economic growth. And when they happen -

STEPHENS: Look, the basic problem also you have is even accepting the idea that stimulus money in theory could - just for the sake of argument - could revive the economy, how exactly is that stimulus money spent?

You know, economists have looked at why this stimulus failed, and they figured out the government doesn't have a very good idea of where to spend the money. So you have cases like Solyndra and other classic case of political allocation of capital where, gee, this seems like a good idea. Solar power is the, you know, energy of the future -

(CROSSTALK)

FREELAND: I think - I think we have to - we have to challenge the premise.

(CROSSTALK)

STEPHENS: -- you're looking at a series of successive failures in this huge investment in so-called green technologies, which could have been predicted were going to be (INAUDIBLE).

The real problem is you don't know where the jobs of the future are going to come from. You talked about schoolteachers and so on. Yes, we'll have schoolteachers in the future. But who's the next Steve Jobs of the - of the -

(CROSSTALK)

FREELAND: Stimulus spending, Bret, though, stimulus spending isn't about betting on the next Steve Jobs. Stimulus spending is about do you believe that you need to kick-start the economy in times of recession, especially after a financial crisis.

STEPHENS: And did the stimulus kick-start the economy?

KRUGMAN: Well, the economy's -

FREELAND: Well, the question is you - you have to think about what would the case be had there been no stimulus? You can't say, OK, the economy isn't perfect -

STEPHENS: You've not have had 800 and -

FREELAND: -- so the stimulus failed.

STEPHENS: -- $850 billion-odd of misallocated capital -

FREELAND: You would have had - you would have had more people unemployed.

I mean, Fareed was - no, Fareed was exactly right.

STEPHENS: That came from somewhere -

FREELAND: You would have had more people unemployed. And the jobs in the middle are the ones being hollowed out. And the place where we're seeing jobs created are at the very top - Steve Jobs, Silicon Valley, great to be a software engineer. And, at the bottom, not so bad to work in a kitchen, to be a gardener.

But what about the middle-class jobs that are really the backbone of the America that I think Steve yearns for?

FORBES: Well, in the 1980s you have the same kind of - of criticism of the Reagan boom, that all the middle class is going to disappear. It turns out that during that period and subsequently we had 40 million new jobs created from top to bottom, whole new industries created.

And Bret is exactly right. Industries we couldn't have even imagined grow up. Who could imagine iPod 12 years ago? If you said that, they would have -

(CROSSTALK)

FREELAND: That's the - that's the problem. Most of those jobs are not -

(CROSSTALK)

ZAKARIA: We've got to go. I'm going to ask two questions before we go.

You - you have written a lot, studied a lot about currencies and were an early critic of the euro. So the question is very simple. Play it out, is the most likely scenario that at the end of the day the Germans will kicking and screaming write the checks, or is the euro in - in actual danger of collapse?

KRUGMAN: Well, the euro is in actual danger of collapse. There's - there is a story where the - where the whole thing falls apart and it's not - it used to be a very remote story, now it's something I can - I can see how it would play.

I think probably not, because I think in the end the Germans will look at the - at the consequences of a failure of the euro, the political consequences more than anything else, and will - will find a way to - to hold it together. Maybe hide off (ph) Greece, but hold the rest of the thing together.

But, boy, I'm a lot less certain of that than I was a year ago.

ZAKARIA: All right, we've - we've had - it was a pleasure to have you on. We haven't had a chance to ask you about your whole other set - set of expertise.

You have twice done this incredible dance of running for the Republican nomination. What is your advice to people trying to do it? Go for the base, go for the center?

FORBES: Well, you've got to win the base to be able to run in the general election, and it's more fun to win than to lose.

And for the candidates who are getting the star power now, like Herman Cain and, to a lesser extent, Mitt Romney, be aware, you're going to go through the hazing process where for a while you're going to be tested and everything you do is going to be criticized. How you hold up under that heat will determine how well you're going to do if and when you get the nomination.

ZAKARIA: Who are you going to vote for?

FORBES: I'm looking at the field now and will be making a decision soon, now that we know who's actually in the field.

I come from New Jersey. Our governor a few days ago made it clear he's not running, so I'm looking at the field and will have a decision very soon.

ZAKARIA: Maybe we'll do it on this program.

Steve Forbes, Bret Stephens, Chrystia Freeland, Paul Krugman, pleasure, as always.

KRUGMAN: Thank you.

ZAKARIA: And we will be right back.

(COMMERCIAL BREAK)

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

All over the world, from China to India to the Middle East, people are worried about the price of food. Poor countries pay 20 percent more for basic food products in 2010 than they did the previous year.

Some say the Arab spring was triggered by food inflation as rising costs were causing public discontent. Even here in the U.S., your daily peanut butter and jelly sandwich is going to cost a lot more. Peanut prices have doubled this year.

The U.N.'s Food and Agriculture Organization or FAO, measures the international prices of a basket of food staples - wheat, rice, sugar, meats. And its data showed that prices reached an all-time high this year. Now, there's good news and bad news. Here's the bad news - I always prefer the bad news first - things are going to get worse. The FAO published a report this week called "Food and Security in the World." It warns that high and volatile food prices are widely expected to continue in the future.

There are many reasons. New entrants to the middle classes want more food and more meat. This month, the world is expected to welcome a baby who will bring our population to seven billion on this planet. That number will rise to nine billion by 2050, and we'll need to produce 70 percent more food than we do right now just to meet that increased demand.

Meanwhile, the world has seen a surge in extreme weather, from Australia's droughts to Russia's wildfires, which has an impact on food production. And these weather patterns are expected to continue.

So what can we do? Well, the best way to get any prices down is through increased productivity. If we could transform food production making more food at lower cost, that will keep prices down. The FAO report has a number of policy suggestions. Among them, improving market information systems and investing in agri research. By the way, that means getting over phobias about genetically modified foods.

But here's the good news I promise. I came across another report this week that had real examples of how to implement these solutions. One answer might lie in the mobile phone.

The Consulting Group Accenture conducted a study commissioned by Vodafone. It found the use of mobile phones among farmers could increase agriculture income by $130 billion across 26 of Vodafone's markets in 2020. Now, while 70 percent of people in developing worlds have mobile phones, only one in four have bank accounts.

Mobile banking could improve those numbers for farmers, increasing access to financial services to the marketplace, and streamlining what is currently a very inefficient supply chain. If farmers know what prices for their goods are in real time, they can bargain better and take out the middleman, who jack up prices and hoard food.

More than one billion people around the world are employed in agriculture. Of these 60 percent are small-scale workers. These farmers are often isolated, have limited transport or access to basic financial services. A mobile phone could go a long way toward changing their predicament and increasing their output. It's just the beginning.

We talk a lot about the need to spur innovation on this show, in technology, in advanced manufacturing. This is just as true in agricultural. Grain yields increased by 120 percent from 1950 to 1980, but only 47 percent since then.

Information technology is just one part of the solution, but it is a powerful tool, and you don't need the new iPhone with all that voice-recognition technology. Any old mobile phone will do. And we will be right back.

(BEGIN VIDEO CLIP)

ZAKARIA: So you think we've basically won the war on terror?

PRINCE TURKI BIN FAISAL AL SAUD, NEPHEW TO THE CURRENT KING OF SAUDI ARABIA: I think so.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

CANDY CROWLEY, CNN SENIOR POLITICAL CORRESPONDENT: The dedication of the Martin Luther King Jr. Memorial is under way in Washington.

Numerous musical groups are performing in honor of the slain civil rights leader. Earlier we heard from members of King's family. His sister, Christine King Faris, shared her personal reflections.

(BEGIN VIDEO CLIP)

CHRISTINE KING FARRIS, SISTER OF MARTIN LUTHER KING, JR.: I don't think my brother's legacy could get much larger. But I was wrong because here I am overjoyed and humbled to see this great day when my brother Martin takes his symbolic place on the National Mall.

(END VIDEO CLIP)

CROWLEY: We will bring you President Obama's speech live in the 11:00 A.M. hour, and we will bring you a rare slice of history seldom seen - Martin Luther King's entire "I Have a Dream" speech.

Now back to FAREED ZAKARIA GPS.

ZAKARIA: The reports this week of an assassination plot against the Saudi ambassador in Washington read like a piece of spy fiction. The reality is that the plot is likely to strengthen the U.S.-Saudi alliance, of course, which has always been an odd relationship. Two very different countries thrown together for practical reasons.

You'll get a sense of that when you hear my next guest. The former Head of Saudi Intelligence for 24 years. In that capacity, Prince Turki Al-Faisal helped run the Afghan Mujahideen War against the Soviet occupation, working closely with the CIA and the Pakistani government and meeting with Osama Bin Laden.

One of the most powerful people in Saudi Arabia, Prince Turki's father and grandfather were both kings and he is a former ambassador to the United States and the United Kingdom.

He sat down with me recently.

(BEGIN VIDEOTAPE)

ZAKARIA: Prince Turki, thank you for joining me.

FAISAL AL SAUD: Thank you, Mr. Zakaria.

ZAKARIA: As the Head of Saudi Intelligence, you dealt with Osama Bin Laden. What was he like as a person to deal with?

FAISAL AL SAUD: When I met him, it was in the '80s. At that time, he seemed to be a very, very soft spoken, very self-effacing individual. His physique, of course, was imposing. He's over 6 foot 3, and broad shoulders and so on. So -

ZAKARIA: But not charismatic in a way -

FAISAL AL SAUD: Well, he - he never appeared to have any charismatic ambitions, you know. He - he preferred to keep himself low key at that time. And he provided help to the Mujahideen by bringing money from not just the kingdom but from other places, as I say, the medicines and et cetera. And this happened during the 1980s until the Soviets withdrew.

When the Soviets withdrew, of course, the whole operation, if you like, or objective of people like Osama Bin Laden was challenged. What else to do? And I think it was at that time that Bin Laden began to turn from the soft-spoken, self-effacing individual into someone who developed ambitions of becoming more prominent, if you like, as a leader of a group that could help Muslims anywhere in the world.

ZAKARIA: Did it surprise you that he was found in Pakistan?

FAISAL AL SAUD: I always thought that - that he would be somewhere between the two countries, either Afghanistan or Pakistan. Of course, when the Americans brought down the Taliban and chased Bin Laden in Tora Bora, if you remember for several months, he must have made calculations that Afghanistan was not as friendly as it used to be before that.

ZAKARIA: You must have also seen the close, very close connection in those days between the Pakistani Military, the ISI, your counterpart in a sense, to Pakistan's intelligence, and the Taliban and their - what ended up turning into the Taliban. So I mean, when I look at the situation now, it seems to me the ISI's ties to certain elements, certain militants, the Taliban elements, goes back a long way, does it not?

FAISAL AL SAUD: It does. And I don't think the Pakistanis have tried to hide that.

I remember visiting Islamabad in 1995. King Fahd had authorized me to - to take a peace proposal to the Mujahideen and the Afghan government. Unfortunately, that peace proposal didn't go far.

And I remember sitting with - I don't know if he's still alive or not - with Minister of the First Interior of the first Benazir government, the Benazir Bhutto government, General Babar. Very bluff person, you know, a huge body and very loud voice, et cetera. And he was telling me, I want you to see my boys. We have - the Taliban have just begun operating in Afghanistan, to help overcome some of the Civil War that was going there. And it was clear that General Babar thought of them as - as his boys.

And so it continued from there. And as you remember in 1998, I was sent to Afghanistan to convince the Taliban at that time to give up Bin Laden and to hand him over to us. I went twice, met with Mullah Omar the first time and the second time. Unfortunately for other reasons, Mullah Omar at first agreed but then subsequently completely dismissed the issue as being unacceptable.

ZAKARIA: What do you think Mullah Omar is supposed to be still effectively running the Taliban and running the opposition - no, people don't know for sure. But how did he strike you? Did he strike you as a - as a smart, strategic leader, as a military leader?

FAISAL AL SAUD: From the two times I met him, he - he seemed to be definitely the leader of the - of the Taliban around him. A man who had - who could show that he fought the Russians personally because he was lame in one leg and one of his eyes had been blown out in some - some military action that he had taken before. And he obviously exuded control over the Taliban at that time.

My view is that today the Taliban have - have branched out. There are other sects and ethnicities fighting the presence of military troops there and I think that will grow as long as there are foreigners there.

ZAKARIA: So you would say draw down?

FAISAL AL SAUD: I would say withdraw, not just draw down. And I've said it publicly before. Taking advantage of killing Bin Laden I think and declaring victory should have been done by the United States, and a decision to withdraw with a timetable, a fixed timetable, not like it is now. Not to withdraw economically or politically or whatever, but simply withdraw the troops.

And I think that would remove a lot of the - of the ways and means by which recruiting people to the fight against the Americans and NATO in Afghanistan would happen.

ZAKARIA: So you think we basically won the war on terror?

FAISAL AL SAUD: I think so. I think by killing Bin Laden and not just Bin Laden - there are other al Qaeda leaders that have been gotten rid of in Afghanistan. In the Kingdom, for example, the al Qaeda cells that had been planted by Bin Laden have practically all been destroyed. So al Qaeda is losing out everywhere.

(END VIDEOTAPE)

ZAKARIA: So we've won the war on terror. How are we doing in the war for hearts and minds in the Arab world? That's what I'll ask the Turki Al-Faisal, Prince of Saudi Arabia when we come back.

(COMMERCIAL BREAK) ZAKARIA: And now more of my conversation with Prince Turki Al- Faisal, grandson of the Founding King of Saudi Arabia, long time director of Intelligence, former Saudi ambassador to the United States. He talks about the uneasy relationship between his country and ours and America's standing in the Arab world.

(BEGIN VIDEOTAPE)

ZAKARIA: Americans are still fascinated, scared by Saudi Arabia. And they look at it, and they just wonder is this still a place that is a breeding ground for a certain kind of Islam, a certain kind of attitude towards modernity that is fundamentally anti-American? What would you say to people who have these fears?

FAISAL AL SAUD: Well, I would start by saying that Saudis are equally scared and interested and curious about the United States, whether it is fundamentally a strategic friend as our governments and our leaders have been consistently saying and performing on that assumption. And sometimes there are questions as to whether that strategic friendship is equally strong on this side of the world as it is in the kingdom.

The only way we can get over that, I think, is to know each other better.

ZAKARIA: But many people feel that at the heart of the regime's stability is this compact it has made with a religious establishment that is quite extreme. Why is it so difficult to make that break? It seems as though the king is - is well liked, he clearly is a modernizer. God knows you have money. Why - why is it so hard to break with this --

FAISAL AL SAUD: Let me start by telling you that the so-called compact as you may have used that word or pact between the religious community and the kingdom and the leadership, the people of Saudi Arabia are religious people. They're - their pride and their source of being is tied to not just the geography of Saudi Arabia and the fact that we have the two holiest mosques in Islam in Saudi Arabia, that the religion of Islam started in Mecca in Saudi Arabia, progressed to Medina, as you know, and the birthplace of the prophet.

And so religion for us is part and parcel of our life. Interpretation of religion is another matter. And in that context, I would dispute the contention that the kingdom or the leadership in the kingdom has ceded place to extremists' interpretation of Islam.

If you've seen during the last 30 years since the attack on the mosque, we've had the hugest expansion, for example, of women's education. Women's employment in government is the largest sector where women are employed, literally in the thousands, whether it is in education or in health services or in other such activities.

ZAKARIA: Prince Turki, you are such a modern, sophisticated man. When you talk about women's education, you still have segregated education. You still have, you know, the - women can't sit in the same room as men in colleges. Surely that must - you must regard that as backward.

FAISAL AL SAUD: You must keep in mind, as I tell you, that the society in Saudi Arabia is very entrenched in tradition and in past history. And the leadership in Saudi Arabia has been trying to either pull or push to move that society to better conditions for everybody, whether man or women, Shias or whatever.

It takes time. This country is - is an example in that. It was established on very high moral principles back in the 1700s and early 1800s. Yet it didn't accomplish full women's integration into the society until 200 years later.

If you look at the issue of blacks and whites in the United States, I was in college here in the mid-'60s. I lived through the Civil Rights Movement. This is, what, 100 and some years after the Civil War, which was fought to liberate the slaves. So societies take time to change with the right leadership, but also I think with the right education.

ZAKARIA: Let me finally ask you, how do you think President Obama is regarded in the Arab world?

FAISAL AL SAUD: Well, today, not as well as he was a year or two ago and this is popular sentiment as shown in many surveys, public opinion in the Arab world is equally measured as it is anywhere.

June, 2009, his speech in Cairo, the highest rating for President Obama. June, 2011, the lowest rating for President Obama. It is - it is a mathematical equation.

ZAKARIA: Prince Turki, thank you very much.

FAISAL AL SAUD: Thank you, sir. It's always a pleasure.

ZAKARIA: And we will be right back.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

(BEGIN VIDEOTAPE)

ZAKARIA: The White House held a state dinner for visiting South Korean Lee Myung-bak this week, and that brings me to my question of the week from the "GPS Challenge."

It is 1874 was the year that President Ulysses S. Grant held a first state dinner for a foreign head of state. Who was the guest of honor? Was it, A) Queen Victoria of Great Britain; b) Kaiser Wilhelm of Germany; C) King David Kalakaua of the Sandwich Islands; or, D) President Adolphe Thiers of France?

Stay tuned and we'll tell you the correct answer. Make sure you go to CNN.com/GPS for 10 more challenging questions. While you're there, check out our website, "The Global Public Square." You'll find smart interviews and takes by some of our favorite experts. And don't forget, you can follow us on Twitter and Facebook.

This week's "Book of the Week" is Daniel Yergin's "The Quest: Energy, Security, and the Remaking of the Modern World." Now, "The Quest" is not as compelling as Yergin's terrific last book, "The Prize," which won the Pulitzer Prize. But this one is almost like an encyclopedia of energy.

If you want to know whether solar energy is viable, it will tell you. Do you want to know the deal on shale gas? Well, there's 25 very good pages on it. Yergin has a section on almost everything. Really worth getting.

Now for "The Last Look." Unless you're on SEAL Team Six or lived on the compound in Abadabad, you will probably never know if this digitally age progressed image of Osama Bin Laden actually looked like him when he met his demise. But there's somebody whom the image looks exactly like - and he is still alive.

Meet Spanish politician Gaspar Llamazares. Quite a resemblance, huh? Well, it's not accidental. The FBI has said one of its artist found a picture of the Spaniard on the Internet. And the Bureau then used it to push the $25 million bounty for the most wanted man in the world by digitally aging him. Oops.

To add insult to injury, the Spanish politician says his picture was used again for this image of Atiyah Abd al-Rahman, another al Qaeda leader who was taken out by a CIA drone over the summer.

Mr. Llamazares, who might want to keep his head down, says he plans to sue the FBI.

The correct answer to our "GPS Challenge" question was C, King David Kalakuau of the Sandwich Islands known now as Hawaii. He was the last monarch of those islands.

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