This is a rush transcript from "Special Report," February 2, 2011. This copy may not be in its final form and may be updated.

BRET BAIER, ANCHOR: The stunning events of the last few weeks in the Middle East have set the stage for dramatic change, change that could have a major effect on U.S. foreign policy. Here to talk about that is former secretary of state James Baker. He joins us live from Houston, Texas tonight. Good evening, Mr. Secretary.

JAMES BAKER, FORMER SECRETARY OF STATE: Good evening, Bret. How are you?

BAIER: I'm well. Thank you for joining us.

You know Hosni Mubarak personally. You met him when he was vice president of Egypt decades ago. You dealt with him for years on numerous issues.

BAKER: Right

We have some pictures of some of those early times. I understand you that haven't talked to him, but just knowing the man for all these years, can you shed any light on what President Mubarak may be thinking, what he may be trying to do at this point?

BAKER: Well all I can tell you is what I've read in the newspapers recently and seen on television and what he said. What he said was he wanted -- he was willing to step down he will not run for re-election. His son obviously will not run for election. He wants more time to effect a peaceful transition.

It is really important that this transition, not only that it occur -- that's important -- but also that it occurs peacefully. The issue now, of course, is whether or not the Egyptian people will believe him and take his word for it. There's a lot of indication that perhaps they won't.

On the other hand it's really really important there will be a peaceful transition. And yes, I worked with him through the years as many other high ranking American officials have. He was never responsive to our suggestions that he open up the political system a bit more in Egypt, that he give more freedom and human rights to his people.

But I gotta tell you this -- having said that, he was a damn good ally of the United States for 30 years. He sent his troops to fight with us in the Persian Gulf alongside American forces. He was a steadfast ally on the war on terror. He was very good in supporting the Arab-Israeli peace process.

And in fact you might have seen today where a member of the Muslim Brotherhood in Egypt said if Mubarak goes there will be a war between Egypt and Israel. If anybody has a huge stake in what happens next, of course it's our strong ally Israel because they do not need an Egypt on their border that is governed by a radical Islamic fundamental philosophy. And that's of course, we don't know yet, nobody knows yet what we might get.

BAIER: Yeah. How do you think the Obama administration has handled this crisis?

BAKER: I think they've done pretty good after some faltering steps to begin with. And I say that this for this reason, Bret. This is a perfect example of why sometimes it's difficult to do foreign policy. We have two interests here and they're -- to some extent -- to some extent in tension with each other. We have our national interests where we have strong ally. One thing we don't want to do is yank the carpet out from under him too precipitously the way we did the shah of Iran in '79. Our other allies in the region will see that, they'll say, "hell, the United States is not a responsible partner, they're not a trustworthy partner."

On the other hand we have our paradigm of commitment to human rights and democracy, and we want to see those things given a chance. We want to see the people in the Middle East and all the countries in the Middle East have a chance at democracy and free markets -- I'm sorry, democracy and human rights, because we think that's the right paradigm.

BAIER: Mr. Secretary--

BAKER: And these two things are in conflict right now and in tension.

BAIER: As you look at a map of the Middle East and you take a look at all of these countries there and the possible contagion of these protests, perhaps, in some of these countries. You have Egypt, obviously, Jordan, Yemen, the president there announcing that he's not going to run for re-election, won't pass on power to his son. You have Lebanon, Algeria, Tunisia -- we saw what happened, Syria, Saudi Arabia and Libya. As you look at that map, do you see this thing spreading, going to other countries?

BAKER: I think it has the potential to do just that, Bret. The fact of the matter is when you let the freedom genie out of the bottle, it's pretty hard to put it back in. And in this age and day of communications technology advances, people can communicate without having to go through the mechanisms they did way back in my day. So yeah, I think there's a very - there's every possibility that it could spread.

BAIER: Two quick things. One, you co-chaired the Iraq Study Group. In that report you said, among other things, your group said that you needed to engage directly with Iran and Syria. And Syria really you thought that Middle East peace really goes through Damascus. Do you think this development in Egypt changes that whole dynamic now?

BAKER: No, I don't think it changes that dynamic. It changes the general dynamic significantly. I'm not sure we said that peace in the Middle East goes through Damascus. I think what we said in that report was that Israel needs to make peace with all of her Arab neighbors and they need to make peace with Israel, and that the Syrian portion of that is perhaps easier to accomplish than the Palestinian portion.

I think that is what we said and we suggested that every effort should be made, but we that we should hold Syria to a lot of things that so far she has been unwilling to do.

BAIER: Last think, quickly. You had a telephone call with the new chief of staff at the White House, Bill Daley. What did you tell him?


BAKER: Well, I should keep that confidential except to tell you it wasn't a telephone call. I visited with him in his office there. I'd occupied that office for four years and he wanted to pick my brain a little, I think, and I was happy to go in there and talk to him a little.

BAIER: Tough job?

BAKER: It is the toughest job in Washington. I told him, I'll tell you one thing I told him, I said "condolences pal." You have the worst job in Washington because your job is to catch all the javelins that are intended for the old man. If they can't get the president, they want to get the chief of staff. So you walk around with a bull's-eye painted on your front and on your back.

BAIER: Mr. Secretary, thank you so much for the time today.

BAKER: Sure thing, Bret. Thanks for having me.

BAIER: With Egypt's leadership crumbling, where is the next domino going to fall? We'll talk about the Middle East repercussions with the FOX all-stars after the break.

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