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Fareed Zakaria GPS

Economy in Crisis; Obama's Trip to Russia

Aired July 12, 2009 - 13:00   ET

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

FAREED ZAKARIA, HOST: This is GPS, the GLOBAL PUBLIC SQUARE. Welcome to all of you in the United States and around the world. I'm Fareed Zakaria.

This week we have an exclusive interview with the man in charge of the world's largest economy, Secretary of Treasury Timothy Geithner. We'll have a wide-ranging conversation, and not a moment too soon, since the green shoots seem to have turned brown.

The hopes for an economic recovery were dashed last week when new unemployment numbers came out, with job losses 100,000 worse than most had predicted. The stock market that had seemed to be predicting a turnaround has reversed course over the last few weeks. Prices of oil and commodities have sunk on fears of a long recession.

Now, you can make too much of a few pieces of data here and there. But what strikes me most is that we are watching a grand economic experiment, and no one knows how it's going to turn out.

There are three big questions that are being tested. The first, is the stimulus large enough to make a difference?

You recall that on this program, distinguished experts like Paul Krugman and Martin Wolf made the case that America's stimulus is too small and too slow to have much impact on a $14 trillion economy. If that turns out to be true, will Washington be willing to spend more, or will it conclude that the whole stimulus idea was a failure?

Second, should the big banks have been forced to dispose of their bad assets?

The Obama administration has taken a middle course as regards the nation's biggest banks. It rescued them, but it didn't nationalize them or force them to sell their assets, to so-called "toxic assets." Was this the right strategy? Or should these assets have been taken off their books, so that they could start lending?

Now, if credit remains tight, the economy cannot recover. And then the question is, will the bank rescue be seen to have failed?

And finally, is this recession different from all others, or at least all others since the 1930s? The gloomy case rests on the fact that this time, consumers enter the recession with massive debt burdens and are going to spend years working off their personal balance sheets. If that's the case, alas, there is very little Washington or anyone else can do except wait. I'll raise all these questions with Tim Geithner. And a conversation with a man whom I don't think you know Obama met in Russia, Boris Nemtsov, former deputy prime minister turned Putin critic.

(BEGIN VIDEO CLIP)

BORIS NEMTSOV: Corruption is not a problem in Russia. Corruption is a system. This is a system.

(END VIDEO CLIP)

ZAKARIA: Let's get started.

(BREAK)

ZAKARIA: And we are joined by the secretary of the Treasury, Timothy Geithner.

Thank you, Mr. Secretary.

TIMOTHY GEITHNER, U.S. TREASURY SECRETARY: Good to see you.

ZAKARIA: Give us your sense of the state of the American economy. There is some good news. But then, a couple of days ago there was jobless claims, which were 100,000 worse than expected.

What's going on?

GEITHNER: Fareed, it's better. But we still face enormous challenges. And it's going to be a while before we're confident we're going to have a strong, sustainable recovery in place.

But if you think back to where we were at the end of last year, beginning of this year, you know, we had an economy falling at a remarkably rapid rate. We were losing jobs at 600,000, 700,000 almost -- a month.

The rate of decline in the economy has slowed dramatically, and the rate of job loss has slowed significantly. Those are very encouraging signs. We're seeing improvement in the financial markets, more confidence by consumers and businesses, both here and around the world.

And that is due to the strength of the policies that this government, working with the Congress and countries around the world, have put in place. These policies have been successful in arresting the decline, providing a little foundation for stability, but it's going to take us some time to get through this.

ZAKARIA: But you -- the administration forecast in February that unemployment would reach 8.1 percent this year. It's now 9.5 percent. So obviously, things are worse than you thought.

GEITHNER: I think relative to what some people were concerned about and what was possible at that time, we've actually made quite a lot of progress in laying a foundation for repair, rescuing a situation that was very dire, and beginning to see the foundations of recovery.

But again, it's very early.

ZAKARIA: But why was your estimate in February wrong? What do you think you missed? Not you, I mean, the administration.

GEITHNER: Remember, it took us a long time to get in this. We dug a very deep hole as a country.

We went through a long period where we were borrowing way too much. We had a huge build-up of risk in the financial sector. You had housing prices rise to remarkably high levels.

And there was no way through this that was not going to be enormously difficult. The adjustment process is going to be very hard. It's going to take time for us to go through that.

But again, just remember, you know, only four weeks ago, people were saying we should be walking back stimulus, we should be cutting back, we need to worry about getting ourselves back to the point where inflation is the biggest risk.

ZAKARIA: But now, a lot of people say -- Warren Buffett most recently, Laura Tyson, adviser to the president, say -- you have to do a second stimulus, because clearly, rising unemployment is a big concern. There is a possibility of further deflation.

Do we need a second stimulus?

GEITHNER: I think all economists believe -- and this was inherent in the design of the program -- that the biggest thrust or force would start to take effect in the second half of this year. And we're going to start to see that happen.

But I don't think that's a judgment we need to make now -- can't really make it now, prudently, responsibly.

ZAKARIA: A lot of people feel that by recapitalizing the banks, but not doing much more in terms of sequestering the toxic assets yet, you've created a kind of series of zombie banks that are stable, but are not really lending.

Now, I realize banks are only part of the credit picture. But is there a problem here that the banks are not lending enough? Is the supply of credit enough, or does it need to be ramped up?

GEITHNER: A very important question, a good question.

Again, I think relative to what we thought was likely, going back to January, the financial system is in substantially better shape than it was.

Both the banking system, which is a -- provides a substantial amount of credit, and the capital markets, the securities markets that provide about half of credit, or between a third and three-quarters of credit to businesses and families. As you know, the program we put in place was designed to make sure there was capital in banks where we needed capital, and that we were starting to repair, backstop those basic credit markets.

And I think on both fronts, things have really improved significantly. The sort of basic tone of markets also feels a little better. It's just reflecting a little bit better confidence.

ZAKARIA: But in September of 2008, you and Hank Paulson and Ben Bernanke basically told the world, the big problem here is toxic assets on the balance sheets of banks...

GEITHNER: Well, I was actually -- you know, I was not secretary of the Treasury then.

ZAKARIA: But you were the president of the New York Fed.

GEITHNER: I was. But I was not the design -- not the architect who designed that program. But that program was...

ZAKARIA: No, but my question is, do you agree that, if toxic assets were the problem, we haven't bought one toxic asset yet? In other words, the TARP program has not yet bought any toxic assets. Why?

GEITHNER: Now, banks have been able to raise capital with greater ease than, I think, anybody reasonably expected. Many banks are selling a bunch of bad assets and shrinking their balance sheets where they don't want a bank as part of their core business. So, that process is happening, and that's helpful.

What this framework of funds we've put in place, announced yesterday, will do is, again, will help get those markets going again. Because things in some ways have been better than people expected, we may see less use, less demand for those facilities than many people thought.

But just to go back to the fall, what Congress authorized back in the fall was absolutely essential. And there is no doubt that helped avert a catastrophic collapse of our financial system.

ZAKARIA: So, but it's fair to say that the money was used for recapitalizing the banks, not buying the toxic -- the assets. In other words, a calculation was made that -- a more effective way to reduce the leverage.

GEITHNER: That was the judgment made back in the fall by my predecessor. I think that judgment was absolutely right, absolutely right.

But we adopted a slightly different approach when we came in, broader framework of solutions, encompassed, I think, any -- all the sort of credible things you need to make sure the system comes back.

Remember, the capital that's been raised by the financial system is raised from private investors, by private investors.

We have actually made very, very limited investments in the financial sector, capital, since the administration came in.

The only material investments in new capital we made outside of AIG and the automobile industry, which are large problems we inherited, were for a number of small banks.

And again, that's because through the effect that our stress tests had on improving confidence and disclosure in banks, not only have you seen about $80 billion of money come bank into the Treasury, but you've seen the largest banks in the country being able to go out and raise from private investors, raise substantial amounts of capital.

And again, you should view this as a sign of -- I would say, a modestly encouraging sign, not a sign of concern.

ZAKARIA: So the program that you announced -- which is to buy these toxic assets, or to provide funding for the private sector to partner with you in buying them -- Warren Buffet said, in the same remarks, he doesn't like it, because it gives too much money to Wall Street. Paul Krugman, the Nobel Prize winner, says you're bribing people to take part, to get into the market.

Is Warren Buffet right?

GEITHNER: You know, I don't share those concerns. But you have to think about these relative to the alternatives.

In the classic model that many people advocated, would have resulted in a much greater subsidy of banks and to Wall Street, and again, and much more risk to the taxpayer.

The classic model is that the government itself goes to banks and says, we'll come buy these assets from you at a price that the government makes up.

And the risk in that context is that the government ends up taking on much more risk, giving a much greater subsidy to banks at much greater costs to the taxpayer. That's the strategy we considered and did not adopt.

ZAKARIA: This is the nationalization strategy?

GEITHNER: Well, no, this is the strategy...

ZAKARIA: Or buying...

GEITHNER: Again, it's just your classic government buys the things...

ZAKARIA: Or the...

GEITHNER: ... (UNINTELLIGIBLE) it sets the strategy.

That carries the risk of a much greater subsidy to banks and investors. And we considered, but rejected that basic strategy.

ZAKARIA: Your growth forecast for 2010 is 3.2 percent economic growth for the United States. The IMF just came out with its forecast, which is 0.8 percent. If their...

GEITHNER: Actually, I really haven't looked at the IMF forecast, but...

ZAKARIA: Economists -- I think it'd be fair to say that a lot of economists think that it's likely to be lower than 3.2 percent.

If that happens, my question to you is, the deficit, as a percentage of GDP, becomes much higher. Are you willing to do whatever it takes to keep the deficit, as a percentage of GDP, within the range that the president has suggested?

GEITHNER: It is very important -- both for the sustainability of recovery, for confidence -- that the world understands, the American people understand, that this government will do what's necessary to bring these deficits down to a sustainable level, as soon as we are confident we have a sustained recovery in place.

The president is absolutely committed to that. He deeply understands how important that is.

His team, economic team that's assembled, lived through a period where a remarkable period of fiscal discipline and response in the United States helped generate a long period of rising private investment, strong productivity growth, a stronger dollar, lower interest rates, broad-based improvement in income standards.

And so, he understands deeply the importance of making sure that we put in place a stronger foundation for recovery as a whole. And part of that will be our return to living within our means as a country.

ZAKARIA: And that may mean higher taxes.

GEITHNER: Well, it'll mean...

ZAKARIA: There's no magic here. There are only two ways to close the...

GEITHNER: Right. As a country -- and there's no mystery in this -- we're going to have to bring our resources and out commitments closer into balance. That is a necessary thing for us to do. And it's going to be a hard thing for us to do, but it's perfectly within our capacity as a country to do.

This is not, you know, it's not -- it is not beyond our capacity as a country to achieve.

And you're right to say that affirming that commitment, keeping to it, is important to sustaining confidence in the recovery. If we don't do that, if it gets away from us, then the risk is the recovery would be arrested, because of higher interest rates crowding out private investment.

And can I say one more thing on this, Fareed?

It's important for people to understand that, what will lead this economy out of this ultimately will be the judgments of businesses and consumers. It'll be private investment and consumption coming back as confidence is restored. And that is what's going to get us out of this.

And what we're trying to do is provide a foundation for that to happen.

ZAKARIA: And we will be back with Secretary of the Treasury Timothy Geithner.

(BEGIN VIDEO CLIP)

ZAKARIA: The primary regulator of the big New York banks was the New York Fed, which you were heading. Is it fair to say that you should have regulated them more aggressively?

(END VIDEO CLIP)

(COMMERCIAL BREAK)

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

Let me ask you about this, because I talked to a number of businessmen in preparing for this conversation. And a lot of them said to me, "Tell Geithner to stop beating up on business. Tell Obama to stop beating up on business. We feel like we're the villains. We feel like we're being treated as though we're criminals. And Congress does it, and they don't stand up."

Where is somebody affirming that businessmen are heroes?

GEITHNER: If you listen to what the president says on this, and, of course, I say all the time, is we, of course, deeply understand that the future of America -- the future strength of our economy -- depends on quality of innovation by business in the United States, on the judgments they make and their willingness to take risk again and put money at stake, and building companies that are going to grow.

There is no path to growth to the American economy that doesn't come with that. And of course the president deeply understands that.

ZAKARIA: Do you feel it's fair to say that they've been battered unfairly?

GEITHNER: Well, I think, in thinking about the financial system -- let's talk about the financial system.

I mean, again, the financial system has suffered a dramatic loss of trust and confidence, largely because of the judgments many leaders of our large institutions made in managing those institutions. And the consequences of those choices were very damaging to people across the country who were very responsible, businesses very responsible in their judgments. And I think those firms are going to still have to do a lot to try to earn back the trust and confidence of not just their business customers and clients, but families across the country.

And I think that it's important just to be direct about that.

ZAKARIA: A lot of them would say there was also a dramatic failure of regulation. And the primary regulator of the big New York banks was the New York Fed, which you were heading.

Is it fair to say that you should have regulated them more aggressively?

GEITHNER: I'm glad you raised that. And I completely agree, and I've said it many times. There were systematic failures in regulation and supervision across our financial system.

And I think the response of that is very broad-based. And I think it goes to everyone who was responsible for supervision in (ph) rating (ph), including the responsibility I had in that context.

But again, look what happened to our financial system. The things that caused catastrophic damage was the build up of risk outside, largely outside, the regulated banking system.

Just look at Bear Stearns, Lehman Brothers, AIG, the monoline insurance companies. Or look at those big banks in the country like Countrywide or WaMu, that were regulated by the Fed, but found those restrictions too onerous, and therefore chose to adopt a thrift charter.

Those were the most stunning pockets of weakness in our system. We should as a country not have allowed that to happen.

And a core part of what the president has laid out in reform is putting in place more conservative constraints on the risk-taking and leverage -- more broadly applied, more effectively enforced across those core institutions that could threaten the stability of the system.

So, absolutely, there were systematic failures in supervision and regulation. And that's one reason why we're moving so quickly to lay out what are very ambitious, comprehensive reforms. And the test of those reforms is going to be -- they're going to be fought and resisted across the financial system.

ZAKARIA: One of the things you said in an interview with Charlie Rose was that one of the causes of this crisis was loose money, that there was too much easy money. In other words, interest rates were too low.

What do your regulatory reforms, though, do about that? How do you get the chairman of the Federal Reserve to be willing to take the punch bowl away when the party has begun, to quote a famous Fed chairman?

GEITHNER: Exactly. So, that's the classic dilemma of central banks and governments, here and around the world.

And again, just to step back again, you know, you had this period where you had this huge generation of wealth around the world, an exceptionally high savings rate, and people were looking for where to put that money, return their money. And that investment in the U.S. and elsewhere helped finance a big boom in house prices and an unsustainable rise in borrowing.

But you're right that the causes, as we've said before, are much more complicated than simply failures in risk management supervision.

And ultimately, of course, to have a more stable system less prone to crisis, you have to make sure that governments around the world, together, don't repeat that mistake of keeping interest rates too low, too long.

ZAKARIA: So you need a good Fed chairman. You have any ideas?

GEITHNER: We have an excellent Fed chairman now. He's doing a terrific job.

And I think this is important to underscore. I think what the Fed did in this crisis -- which was without precedent, subject of enormous controversy, important for people to look back over time and, you know, evaluate those judgments. But I think what the Fed did through this period was absolutely essential and helped stave off a much more catastrophic outcome.

But I think what the Fed did was not just essential, but extraordinarily helpful in helping contain the risk, help slow the -- reduce the risk of a more catastrophic...

ZAKARIA: But that sounds like a vote for the reappointment of Ben Bernanke?

GEITHNER: Well, again, I said -- I think the chairman has done an exceptional job, and I think he deserves a lot of confidence.

ZAKARIA: The regulatory reform you have put in place -- and this is the last question I'm going to ask about this -- it still leaves entities that seem too big to fail. You still look at the structure of American finance, and you, in a way, might have created bigger moats around them. There might be greater barriers to entry. But you will still have very large, behemoth financial organizations.

GEITHNER: A very important question.

I mean, you cannot design a system to be completely invulnerable to the risks. You may face a future crisis of sufficient magnitude, that you would see systematic failure across the system. And you can't adopt a strategy in that context, where the risks are acute like we went through, and hoping it's going to burn itself out. And if you just look at what happened when Lehman failed -- and Lehman was not the cause of the crisis, but is a symptom of how severe it was, and it did make it substantially worse -- you can see one of the consequences of allowing failure to happen on a scale that can cause catastrophic damage.

The damage to confidence globally, what you saw it in equity prices globally, is a good cautionary note about not just our ability to design a system that prevents failure, but our capacity in extreme conditions of stress to basically hope the market will work these things out.

So, we want to do -- we're going to as much as we can to reduce the risk of a crisis of this magnitude. But we also need to make sure the government has got better tools to manage the failure and contain the damage when it happens.

ZAKARIA: When AIG was bailed out, a lot of money -- tens of billions of dollars -- went directly from AIG to a series of New York banks to pay what was called the counterparties on these CDS contracts.

GEITHNER: Not principally New York banks.

ZAKARIA: The banks all over...

GEITHNER: They'd actually written a bunch of commitments to a number of banks in Europe and around the world. They also wrote a whole bunch of commitments to ensure the saving products of average American -- an enormous number of financial commitments they made.

And of course, the problem was that they didn't have the capital...

ZAKARIA: Right.

GEITHNER: ... to back up those commitments.

ZAKARIA: Right. Precisely.

So, the question a lot of people ask is, why did those contracts have to be paid at what is called 100 cents on the dollar? Which is, why did you not engineer a discount, which is often what happens in these circumstances?

And the feeling is -- to complete the thought -- that a number of the beneficiaries were New York banks that had very close ties with the United States government, banks like Goldman Sachs.

GEITHNER: A very important question.

I think the best way to explain it is to go back to what I said earlier, which is that the United States came into this crisis without the tools and authority to manage the orderly failure unwinding of a large complex institution like AIG. We had that capacity for small banks and thrifts -- did not have it, do not have that authority. So, we were very limited in the choices we were able to make. Those were...

ZAKARIA: So you really couldn't go in and say ...

GEITHNER: Again, they were contractual commitments. And there was no way for them not to honor those commitments without risking default.

Default would have led to exactly what you saw in the wake of Lehman. And that outcome was important to avoid. And fortunately, for us as a country, we had the ability to avert that outcome in AIG, but we did not have it in the context of Lehman.

That's why that was necessary. But that's why it's so important, and we moved so early to try to propose to the Congress to provide us broader resolution authority, to give us more flexibility and better choices to manage those kind of risks in the future.

But again, there was no way to do what your questioners advise in that context without the risk of default and precipitating exactly the kind of damage you saw to the whole fabric of the financial system, here and around that world, that you saw in the wake of Lehman.

But with better resolution authority, we'd have a little bit more flexibility, better choices in the future, could come in earlier, may be able to achieve a better outcome at less cost to the taxpayer.

ZAKARIA: And we will be back with Secretary of the Treasury Timothy Geithner.

(BEGIN VIDEO CLIP)

ZAKARIA: You've been through one of the most turbulent periods in American financial, economic history.

GEITHNER: It's not through yet, Fareed.

ZAKARIA: Right. At this point.

(END VIDEO CLIP)

(COMMERCIAL BREAK)

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

Mr. Secretary, you're off on a trip, and you're going to Europe and other places.

I have a quote here from Mr. Trichet, Europe's central banker. And he says, "I have one message. It is extremely important that the United States say that a strong dollar is in the interests of the United States."

GEITHNER: It is my pleasure to say it. A strong dollar is in the interest of the United States. Of course, I deeply believe that.

And our commitment is to the world -- and, of course, the American people -- is to make sure we put in place the policies that can sustain confidence in this economy and this financial system.

ZAKARIA: You don't worry that the dollar is going to weaken as the reserve currency of the world, as the Chinese talk about, wondering if there are some alternatives, as the Russians talk about it? The arrows seem to be pointing in that direction.

GEITHNER: You know, I actually don't worry about that, Fareed, in part because, I think if you just look at the response of the world as we go through this period of time, when people are most concerned about risk, generally they want to be investing in the most liquid, safest market in the world, which is still the market for our Treasury bills.

And I think you've seen that pattern consistently over a period of time. And we want to make sure we can sustain that basic response.

ZAKARIA: You talked about the global imbalances that caused this problem, or at least were part of the backdrop of it. Part of the solution has got to be that we spend less, we consume less, as you said.

But partly, surely, it is also that the Chinese, principally, save less. That is to say, that the policies of the Chinese government, that actually make it difficult for Chinese consumers to consume more, are also changed.

Have you made any headway in getting the Chinese to stimulate domestic, private consumption -- not the government spending money, but the private Chinese consumer?

GEITHNER: You're absolutely right. A critical part of an effective strategy for the world is going to be to make sure that, in those countries -- like China, but not just China -- that they are shifting the sources of future growth to domestic demand, to domestic consumption. And I think if you listen carefully to what the Chinese say, they believe in that imperative.

In, I think, two weeks, Secretary Clinton and I are going to host the first meeting of the Strategic and Economic Dialogue with the leadership of China.

And a core part of the economic part of that discussion is for us to put in place a common framework that, as we raise our savings in the United States -- which is necessary and is already happening in a significant scale -- that the world as a whole adjust to that new reality, and put themselves on a path where you're going to see stronger domestic demand growth in those countries.

But I think if you listen carefully to what the Chinese say, I think they believe in that imperative.

And if you look at the content of the policies they're committed to in terms of strengthening the safety net -- reducing the need, the incentive, to save at exceptionally high levels to deal with risk that governments normally help ensure against -- if you look at what they're doing to their financial system -- which is to put in place a more market-oriented financial system -- if you listen to what they say about the future evolution of our exchange rate policy and monetary policy, I think you see in that a basic recognition of this imperative.

And so, I actually am reasonably encouraged that...

ZAKARIA: But they haven't done anything yet.

GEITHNER: No, I think, actually, you know China -- I mean, just think back over 30 years. I think China, relative to almost any other country in the world, has done an exceptionally good job of setting out a set of basic strategy and delivering on that strategy.

And, again, if you look at the basic thrust of strategy in China, there is a lot to be encouraged by, and they have a good record of delivering on that. Now, of course, they're doing things that cut against that a little bit now, like you see that around the world. And they're under enormous pressure to do more things that cut against that.

I think the big thrust of policy and the big arc of policy in China will recognize that imperative. But we're going to try to use this very important strategic relationship with them to put that in place. And I think that's very important to the world economy as a whole.

Obviously, the rest of the world is watching, and it wants to be confident that we have the capacity to work together to solve these kind of problems. And I actually am very encouraged by what we've achieved, what we see so far.

ZAKARIA: You've been through one of the most turbulent periods in American financial economic history...

GEITHNER: It's not through it yet, Fareed.

ZAKARIA: Right. At this point.

What is the principal lesson you have learned?

GEITHNER: You know, I think, again, I believe that the strategy the president laid out took the best of experience around the world in dealing with financial crisis, and made the basic strategic judgment that the risks would be greater to the world and to America, if we had been more tentative.

And I think the strategy we put in place validates the basic judgment that, in a crisis of this severity, you have to be very aggressive, to put in place strong measures to support demand, get private investment, employment growth back. And you have to make sure that you get the financial system stable and working again, because without that, you court greater disaster. So, I think that lesson, which the world has learned painfully over time, is a lesson at the core of the strategy we adopted. And I think that was the basic, the right strategy.

But again, you know, we're going to face a challenging period of time. It's going to take us a while to get through this. And you're going to have periods where progress is uneven.

It's, I think, very important that we be realistic and explain to people that -- and I think the American people understand that it took a while to get into this, and it's going to take a while to get out of this.

ZAKARIA: Timothy Geithner, a pleasure to have you.

GEITHNER: Nice to see you. Thanks for having me.

ZAKARIA: Thank you.

(COMMERCIAL BREAK)

ZAKARIA: Now for our "What in the World?" segment. Here's what got my attention this week.

This is Secretary of State Clinton meeting with the former president -- for now -- of Honduras, Manuel Zelaya. You remember, Zelaya was overthrown two weeks ago today by the Honduran military.

Since then, support for him has been rolling in. The Organization of American States has suspended Honduras' membership. President Obama came out on Tuesday in favor of the restoration of the democratically elected president of Honduras.

Let me register a modest dissent.

While Zelaya is indeed the democratically elected leader of the nation, what he was trying to do was decidedly undemocratic. You see, the timing of the coup wasn't random. It was to stop a referendum Zelaya had called for the next day -- an illegal referendum that would have trashed one of the eight unalterable pillars of the Honduran constitution.

Zelaya was trying to abolish term limits to allow himself to stay in office indefinitely. The nation's supreme court and attorney general had already declared Zelaya's plan unconstitutional. And Congress had begun impeachment proceedings.

Still intent on going forward with the referendum, Zelaya was arrested on orders of the Honduran supreme court.

Zelaya is a radical who declared himself a Socialist in 2007, and has been destroying his country's prospects for growth. Hugo Chavez is one of his closest political allies and his role model.

Indeed, Zelaya probably got the idea for his referendum from Chavez, who did the same thing in his country, as did fellow leftist, Rafael Correa of Ecuador, and Evo Morales of Bolivia. The difference is, all of them succeeded.

So, while we should support democracy and we should be against political change by military coup, we should also be opposed to unconstitutional power grabs by radical demagogues.

We will be right back.

(BEGIN VIDEO CLIP)

BORIS NEMTSOV: Everybody knows -- in answer to the question, who is Mr. Putin -- everybody knows that Putin is against the West, and Putin is against the United States. That's why, to establish a new relationship and to reset our relationship with Putin, it's absolutely impossible.

(END VIDEO CLIP)

ZAKARIA: You probably saw President Obama in Moscow this week meeting with Vladimir Putin and Dmitry Medvedev.

But Obama had another meeting you may not have seen, with a man so disliked by Putin and Medvedev, that some Russian journalists were reportedly afraid to cover it. That man is Boris Nemtsov, one of Russia's original reformers, formerly deputy prime minister of Russia, now very much in opposition.

Welcome, Boris.

BORIS NEMTSOV, FORMER DEPUTY PRIME MINISTER OF RUSSIA: Yes, thank you very much for introduction. It's a pleasure to be with you today.

ZAKARIA: Boris, did you think that President Obama had a successful trip to Moscow?

NEMTSOV: Obama is not a god. He is a great president, but he is not a god.

He did everything he can, and I think that he achieved in different way some results.

He showed that he believes in a democratic, strong and a powerful Russia. And he talked always, everywhere -- in Russian economic school for example, when he met with me and with opposition -- he talked always about, that if you want to be successful, if you want to be a great country, the only chance for you is to forget about censorship, is to forget about corruption, is to forget about authoritarian style of governance, but to think about rule of law, about democracy and about freedom of speech and free elections.

What is very important is that Russian Putin TV did not show his speech.

ZAKARIA: This is the speech he gave to the economic school in Moscow. It was not covered live on Russian TV. NEMTSOV: Yes, exactly. Exactly. And no channels in my country, no channels showed a very important Obama speech, when he talked about that American never fight Russia in the Second World War, in the First World War, even war against terror. Russia and the U.S. were together.

But no Putin's channel showed that.

ZAKARIA: Why do you think that is?

NEMTSOV: No Putin channel showed. They're afraid, you know. They are weak. They are afraid of opinion which differs from Kremlin official opinion.

ZAKARIA: And your feeling is that...

NEMTSOV: They do not always...

ZAKARIA: And your feeling is that Putin has been building up a certain kind of anti-Americanism, and this would conflict with that program.

NEMTSOV: Yes. What is funny, what is really funny, Fareed, that for these three days when Obama and his wife and two brilliant kids spent in Moscow, Putin stopped anti-American machine. Putin stopped anti-American propaganda at all, you know. Special guys who always appeared on his channels disappeared during the visit of Obama.

Yesterday, I said, "Mr. President, if you will stay in our country for a long time, I believe that anti-American rhetoric will disappear in our country."

But anyway, what's happened that he stopped anti-American propaganda, which is a basic point of his politics. On the other hand, he doesn't want -- I mean, Putin doesn't want -- to show what is real American position concerning human rights, concerning rule of law, concerning democracy.

ZAKARIA: Let me ask you, Boris, you...

NEMTSOV: That's why...

ZAKARIA: You met -- Boris, you met with George W. Bush. Bush had similar meetings with Russian opposition leaders. How was Obama's different?

NEMTSOV: I explain it to you. That's a huge difference.

Bush really came to Russia, and he was like a big teacher, right, who explained to us how important is democracy, how important is political competition, how important it is to be open and how important is freedom of speech. Right?

We sit down in the American embassy. In the end we shake hands, and that's it. Right?

Obama, we met in the Ritz Hotel. He mainly listened to us. And he just made final remarks about our ideas.

But he wanted to recognize what is real situation in Russia, what Russian people mean. And he listened mainly.

ZAKARIA: Let me ask you about the condition of the real Russia.

You have an article in Newsweek, in which you point out the, to me, stunning statistic, which is that Russia has now dropped to 147th in the world in transparency indexes, corruption and written listings.

So, one of the things we used to often hear was that Putin and his regime had been successful and popular in Russia, because they had brought order and they had brought prosperity.

Are people now feeling that this is a regime that is highly corrupt? What is the view of -- you know, what is the average Russian's experience today?

NEMTSOV: Well, first point, Putin was popular because of very expensive oil.

For the last eight years, before crisis, real incomes of ordinary Russian people increased 10 percent per year, and unemployment rate was less than 3, 4 percent. That's why Russian people were very happy. Right? And they don't...

ZAKARIA: And that's all because of the high oil prices?

NEMTSOV: Yes, yes, high oil prices, commodities prices, gas prices for example, right.

That's why people didn't care about corruption, about some underground (ph) things inside Kremlin, et cetera.

Corruption is not a problem in Russia. Corruption is a system. This is a system.

And according to transparency information (ph), like you mentioned, we are in the 147th place, but not because Russian people want to take bribes, but because of Putinism, because of the system.

I think that this topic now, step by step -- not immediately, of course -- but this topic, step by step, will be very, very in the focus of public opinion.

ZAKARIA: Boris, one of the things President Obama seemed to do, at least to me, was to really try to make a distinction between Putin and Medvedev. And he said, Medvedev seems to be a modern man, Putin has one foot in the old world, one in the new.

He met with Medvedev, primarily. He had a breakfast with Putin. He did not have a dinner. He chose to have a private dinner instead.

Is making this distinction between the president, Medvedev, and Prime Minister Putin, who many believe wields real power in Russia, was that a smart move for Obama to do? NEMTSOV: Yes, I think that he did a great job as far as such distinctions are concerned -- a great job.

Why? He always mentioned that America and the president of the United States based on rule of law. Right? Obama showed that he wants to talk with the guy who is responsible, because of law.

Everybody knows that Putin is against the West and Putin is against the United States. That's why, to establish a new relationship and to reset our relationship with Putin, it's absolutely impossible. You know, it's absolutely impossible. And to repeat the same failure, like George W. Bush did, I don't think that this is smart politics.

That's why Obama wanted to try, just wanted to try, to establish a relationship with Mr. Medvedev. Yes, he is weak, you are right. That's why he was chosen like a successor. But on the other hand, he's younger, he has no experience in the KGB, and he has experience in business, which is great news.

And this is a window of opportunity. And I think that to use such kind of opportunity, it will be a quite smart position.

ZAKARIA: Thank you so much, Boris Nemtsov, from Moscow.

NEMTSOV: Thank you.

ZAKARIA: And we will be right back.

(COMMERCIAL BREAK)

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

Last week, I asked you whether you approve of the moves Treasury Secretary Geithner has made so far. After something of a rocky start, we wondered, do you think he's doing better?

The answer -- from GPS viewers, at least, I'm afraid -- is a resounding "no." Almost unanimously, our viewers were critical of Secretary Geithner, with many opining that he should be replaced. Perhaps today's interview changed a few minds.

Now, my question for this week. It's actually a question I raised at the top of the show.

Is the U.S. stimulus large enough? Do you think it will eventually work? Or do you think we need a second stimulus, as many on Capitol Hill and many economists are suggesting?

Let me know.

As always, I'd like to recommend a book. It's called "The Geopolitics of Emotion: How Cultures of Fear, Humiliation, and Hope are Reshaping the World," by Dominique Moisi.

The subtitle gives you an idea of what it's about. Moisi, a frequent guest on this program, says those three human emotions are key factors in the world's political conflicts. Asia is full of hope, the Muslim world beset by humiliation, and the West is ruled by fear.

But what the title doesn't do is give you an idea of just how good the book is -- fascinating, really worth reading.

Remember, you can now follow us on both Twitter and Facebook. Go to our Web site, cnn.com/gps, for links and information. While you're there, make sure you try the Fareed Challenge, our weekly world affairs quiz.

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