Business

Blankfein & Bloomberg On The U.S. Economy, Fed Policy And 2016 [FULL TRANSCRIPT]

Goldman Sachs CEO Lloyd Blankfein and Bloomberg L.P. founder Michael Bloomberg spoke with Bloomberg Television’s Stephanie Ruhle about the state of the U.S. economy, Fed policy and 2016.

Blankfein said U.S. markets are poised for prolonged growth: “We are in for a longish, positive market…Since the financial crisis, especially in this country, there were a lot of problems; we chewed through them. Consumers have deleveraged.  The banking system is deleveraged.  We got the blessing of low energy prices.  Housing prices started to stabilize and move higher.”

On the potential impact of the first rate hike by the Fed, Blankfein said: “It will be jarring when we see an interest rate hike because we have not had one for some time.  And then I think people will get out the smelling salts, take a sniff, and recover…If we end up with interest rates at half a percent or even if they went over time in the near future to 1 percent against the growth rate, it will only be because the growth rate is at trend growth or maybe even higher, and that will still be substantially easier financial conditions than we usually have.”

When discussing 2016 and choosing candidates, Bloomberg said: “The executive’s job is to bring along the legislature…You do not go and do a poll and ask the public what they want and then try to take them there.  That is leadership from the back.  You are elected to go and to say this is what I’m going to do and convince people to come along with you and have the horses to get us all there.”

Lloyd Blankfein and Michael Bloomberg

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STEPHANIE RUHLE:  It’s a busier day here at Bloomberg world headquarters.  Goldman Sachs with Bloomberg talking small businesses, promoting Goldman’s 10,000 Small Business Program.

Gentlemen, thank you, welcome.

As we sit here and talk to these small business owners, they have got to be worried about the U.S. economy.  You are looking at them from CEO, from chairman seats, but what do you really think the U.S. economy looks like right now?

MICHAEL BLOOMBERG:  There is clearly a lot of job creation.  There is clearly a lot of angst among people that — we are not addressing the big issues like immigration and tax policy and guns in the streets.  There are worrisome things happening all around the world.

But the average person is not doing all that badly.  In all fairness to Obama, during his administration in the last few years, jobs have been created and the jobless rate is way down.  Still plenty of people who do not have the kind of jobs they want, don’t have full-time jobs and that sort of thing, but there’s always going to be problems.

So it is not perfect and I certainly am very worried about the future — Iran and all of these different things.  But the average small business man seems to be — or business person seems to be coming back, starting another business, and being able to create jobs.

LLOYD BLANKFEIN:  I agree.  I think the sentiment is very negative.  We are in the middle of an election cycle and there are a lot of things that are wrong with the economy and a lot of things that could go wrong.  My core job requires me to worry and to think about and deal with all the things that could go wrong.

But I think if you just kept it simple, you would say that the United States is growing almost at — kind of a trend growth, whether it is 2.5 percent or just under 3 percent growth, or maybe even a little above it, no, but around trend growth with interest rate policy and for very good reason at levels as if we were in a recession.

So financial conditions are very easy.  The energy situation, most of the economies in Europe have broken to the high side.  And I say if you just look at it very simply, things are going to go very well, with a number of things to worry about, but that’s an added complexity that people are putting in.  I would say keep it simple and things are moving forward.

RUHLE:  Do you think this tremendous bull run that we are seeing in the stock market is warranted?

BLANKFEIN:  I think we will know that with respect to the history.  But I will tell you when I got out of school in the late ’70s, we had inflation over — double-digit inflation, double-digit unemployment.  Also a time of very bad sentiment in the world.  This of the — you know, the Jimmy Carter passing the reins to Reagan in a split screen with Reagan getting inaugurated and the hostages marking home, very bad time.

And guess what?  It’s turned it was the start of a 20-year bull market because while all that bad stuff was going on, people were deleveraging and dealing with the problems. They did not feel like that, they didn’t feel good, and they would not have forecast it.

But guess what?  We chewed through those problems. And I’d say since the financial crisis, especially in this country, there were a lot of problems; we chewed through them.

Consumers have deleveraged.  The banking system is deleveraged.  We got the blessing of low energy prices.  Housing prices started to stabilize and move higher.  I think we are in for a longish positive market.

But again, if you look back, it’s like looking down at a big, ugly city from 30,000 feet.  It all looks so clean.  And when you get on the ground, you see the problems.  Even in  that 20-year cycle, there were a lot of bad moments.

But if you look at that 20 years afterwards, it was definitely a bull market cycle.

RUHLE:  Mike, do you agree?  It seems there are so many  problems around the world and even here, yet the market continues to tick higher.

BLOOMBERG:  Well, Ive always run my life assuming the worst is going to happen because that is what you have to prepare for.  Dealing with success is easy.  You have to learn how to deal with failure.  And one of the things I  worry about is we are not teaching our kids how to deal with failure.

And Lloyd and I just did an event with this 10,000 Small Business organization that Goldman Sachs has sponsored to help small companies.  And one of the things that Lloyd said was that no career goes up in a straight line.  You always will have reversals.

And I think we will have reversals.  And in my own investment policy, I have a lot of cash in terms of the company.  I worry about what can go wrong.  We have got plenty of people working to make sure that things go right.

But having said all of that, it is not doom and gloom.  We still have the same problems. We keep kicking the can down the road.  But we do seem to be able to live with that.  We have not changed our tax policy in a very long time, everybody agrees it should be done, but we still go on.

We have a fractured Congress that cannot get together and can’t do anything, but we are still going on.  So the big things you have to worry about are things like the Iran treaty, which is very worrisome to me; like our relationships with some of the other countries around the world; like our immigration policy.  Those are the things that can have long-lasting consequences.

And, lastly, you come back to we are selling our birthright in terms of not having good schools for our kids and not having the same fiscal policies in government where we are not spending money today that our children will have to come up with tomorrow.

RUHLE:  Mike says the way he runs his life, his business, he thinks the worst is yet to come.  You have a long-term goal on China in the last few weeks.  We are suddenly saying, should we wake up and realize things are much worse there then we realize?

Have you changed your view in any way?

BLANKFEIN:  In the big picture, I knew — you know, China has an incredible execution problem to get through.  You have an economy that’s trying to get in — through in one generation what took 150 years to evolve in other places.  And it is very hard to bootstrap if you have to do everything at once.

And so you would like to have businesses that aren’t overpadded with people.  But guess what?  In China, if you fired those people, there is no unemployment insurance to cushion the blow.

Or you want to go out and create insurance companies, but guess what?  Those pool of capital to invest in are not there because you don’t have capital markets.

China, you do not have capital markets.  So how do you write off your mistakes?

If you go out and you stimulate the economy by building 80 airports at once, 40 of them may turn out to be in the wrong place.  You build an airport in the wrong place in the United States, planes do not land there.  They do not pay fees.  Debt service does not get paid.  It defaults and it’s gets taken over.  They pave it over and they put up a shopping mall.

In China, it just stays there as an unused airport.  That is the system.  It has to be corrected.  They know it.  And it is going to take time and I didn’t just discover that.  I know that for a long time that it’s going to be an incredible execution problem.

But it does not stop me from thinking that in the long term it will sort out.  I said this before.  I think this will be a great century for China like the 20th was a great century for the United States.

But in our great century, we had a lot of bad years and China will have a lot of bad years in its century.

RUHLE:  But is there such a thing as long-term in terms of investing anymore?

Whether it’s Ray Dalio at the beginning of the year and his view on China and changing his tune, or when you talk to Stan Druekemiller (ph), he could be negative on the overall economy —

(CROSSTALK)

BLOOMBERG:  You got to differentiate between investigators that buy and sell stocks and people like Lloyd Blankfein that run companies.  And they have to have a much longer term.

There’s — you have to — I can tell you how to raise your kids.  Mine are little more complex.  OK?

(CROSSTALK)

BLOOMBERG:  But it always seems like the — your problems are worse than the other person’s.  And you cannot have that.  You have got to keep going on.  You’ve got to have some confidence.  You’ve got to invest in the future.

And if you take a look at how far China, for example, has come in a very short time, we can talk about how far they have to go, but so does America.  Every problem that China has, we have a comparable one.  It may not be the same one here, and they approach it with a very different mentality and a very different system.  They have brought 150 million people into the middle class.  They still have 400-500 million people who live on a dollar a year and really need some help.

But they are making a big different for their people.  And so has America made a big difference for our people.  The poor in our country need a lot of help, but they are better off than the poor in many places themselves.  That does not mean we should not stop.  We should be thankful for how far we have come, but we have got to  always realize there is more to do at Goldman Sachs, at Bloomberg, at America, at China.

(CROSSTALK)

BLANKFEIN:  Just as a thought experiment, thinking in the short term and long term, if I said you have to — would you invest in China for the next year, think of your answer to that question.  And then if I said to you, you had to invest within — for 20 years, but you couldn’t touch it for 20 years, it was for your children, would you invest in China for the next 20 years?

RUHLE:  The answer would possibly be yes, but now you’re running into the problem that CEOs face, politicians face.  They cannot make decisions for the long term because they could have an activist investor banging down their door, saying what are you doing tomorrow?

Like politicians cannot make decisions long term because they need to get elected next year.

So how can we — ?

(CROSSTALK)

BLOOMBERG:  — activists have pretty good records in terms of turning companies around.  And “Businessweek” had a story about that, looking at the record of some of these people and it has been very good.

But also you have to stand up.  Just because somebody comes in and says you should change the business model like Goldman Sachs, it does not mean you have to go do it.  That is what leadership is all about.  And if his board has confidence in him and his stockholders have confidence in him, they will let him go and they’ll ride with him through the tough times because he’s shown in the past that he can do it.  And he is not going to make all the right decisions, but long-term, he can keep going.

Now the life expectancy of CEOs in America is 4-5 years, depending on how you measure it, something like that.  And social media puts an instant referendum on everything.  So things are different here.  But still, great companies like Goldman Sachs and a lot of the other big banks here have — they’ve gone through good times, bad times, dealt with regulators that are rational, irrational; dealt with markets that they could not control, dealt with markets that they influenced on some things, good, bad, whatever.

RUHLE:  Are you saying that there are some markets that Goldman Sachs can control?

BLOOMBERG:  No, no, but that he can control how he approaches those markets, how he puts in place the right people and the right systems and which businesses to go in, which businesses he has confidence in, his organization has confidence in.

And it’s not everything and he has got to make those decisions.  And over a long period of time, look at the history of Goldman Sachs.  On balance, they have made the right decisions.  Not everyone, but on balance, this is a company that is still growing.  And there are some of the other big banks that have done the same thing.

BLANKFEIN:  One of the major contributions of the activists, it has forced people like myself and others to engage their shareholders even more than they have in the past.  And when you engage your shareholders, you have got to have something to say.  And so to the point that activists are trying to stimulate short-term gains, you are in a position to say, to argue to your own shareholders and persuade your shareholders that the short-term gain is a sacrifice of long-term success.  And you make your case to the shareholders and they make the case to the shareholders.

And you know something?  It is a market and it is not a bad thing to have to do that.

RUHLE:  What matters to you?  When we get the Fed minutes, is it going to affect your outlook on the economy, the moves you make with your company, how you advise your clients when we see this interest rate hike?

BLANKFEIN:  Well, I think it will be jarring when we see an interest rate hike because we have not had one for some time.  And then I think people will get out the smelling salts, take a sniff, and recover because when we have that first hike, the Fed has already suggested that it will be very conservative, at the trajectory of future hikes.

And so if we end up with interest rates at 0.5 percent, or even if we went, over time, in the near future to 1 percent against the growth rate, it will only be because the growth rate is at trend growth or maybe even higher.  That will still be substantially easier financial conditions than we usually have.

It’s a funny set of circumstances that make interest rates so low — while growth is so embedded.  And that is because of the uncertainty that the growth is really truly embedded.

And the Fed  would rather take a risk on having rates too soft for longer than run the risk of giving up all that they have accomplished and in getting  the economy to where it is now.   And so they will keep things easier for a long time.

BLOOMBERG:  You can also argue that because Congress is so fragmented and paralyzed, we don’t have much of a fiscal policy and the Fed has no choice but to do some things that it was not really designed for and I do not think monetary policy is the right way to go about it.

But if nobody else is going to do something, they feel an obligation — and probably right that they have to do something.

Having said all of that, there does seem to be a lot of job creation.  But I do not know any business person that will decide to go into a business or build a building because interest rates are at 0.25 percent versus 2.5 percent.

I mean, come on.  If interest rates and tax policy are the guiding factors in terms of whether an investment makes sense or not, you’re making the wrong investment.

RUHLE:  Then is the fact that Fed action is — almost seems solely important to investors, or short-term investors — is that the right move?

Shouldn’t —

BLOOMBERG:  Well, I think — there’s no question that they have — the Fed’s low — in my mind, anyways — no question that low interest rates have exacerbated the wealth gap between the poor and the rich because the rich have assets.  And that is what is being hiked here because of low interest rates, whether they own stocks or real estate or whatever the case may be.

And long-term, that is a very big problem for this country.  And you do not solve the problem as the populists would argue by taking things away from the rich.  You solve the problem by giving opportunity to everybody and by creating jobs.

And some of these things, I think — some of the policies are misguided.  I, for example, am not in favor and have never been in favor of raising the minimum wage.  I think you should raise the income tax credit, which does the same thing for the same people, but it spreads the burden across all the taxpayers rather than just a small number of business people, whose inclination would be to cut back employment.

Earned income tax credit does not get anybody to cut back.  It gets them to hire more people.

BLANKFEIN:  I would say these data points take outsized importance at a moment in time when we look kind of cuspish as to which way money policy is going to go.

And so since the Fed’s activity is data dependent, the next data point takes an outsized importance.  That is just the way it is.

RUHLE:  We are talking policies and a fragmented Congress.  We are coming up on an election.

Is there a possible candidate who can help us get through this?

Many of us just put our hands in the air when we look at Washington and say, well, we’re just going to be in this gridlock forever.

Is this our opportunity to get out of that situation?

BLOOMBERG:  Well, there are 16 or so —

(CROSSTALK)

BLOOMBERG:  — you have a lot of choice there.  We’ll see what happens.  It is a very long way, Stephanie, from now until the primaries, a year from September.  And the election a year from November.  And half the people running today aren’t going to — most of them will not be there then.  There will be people then that aren’t there now.  There will be issues that we talk about then that we never thought about.

All of the mishegas that you read about every day in the paper will go away and be replaced by something else.  The press has to have a crisis, has to have a story, has to have excitement, and failure and scandal and that sort of thing.  So there will always —

(CROSSTALK)

BLOOMBERG:  Yes, that’s the way it is.

RUHLE:  Then as a business man, as a voter, for you, what for you is the most important issue as we face the election?

What do you care most about?

BLANKFEIN:  You know, it’s funny. What I don’t — what I care most about is not a single issue.  It’s a culture and a course of dealing.  I think this country has very diverse interests.  And I think the best — what I would like to see is people who go to Washington not with a set of instructions to never compromise, but you go to Washington to compromise.

Can you imagine if this country, which had vast sectional differences, agrarian South, industrial North, different states or colonies with different interests, some religious, some commercial, getting together and forming a country — imagine if you went to the convention and each one came with a mandate and a commitment to stay on the fringe of what his specific electorate commanded and to go there —

(CROSSTALK)

BLANKFEIN:  — you wouldn’t  have a country.

And you know something?  I have confidence in the republic.  And I think it — we’ll surmount it.  But if it kept on like this, we would not have a country now.

So to me, I would like to see — I am for the moderate that is open to compromise and have it coming out with a stable set of principles.

RUHLE:  It sounds like you are asking Mike Bloomberg to run for president.

BLOOMBERG:  No, no, it’s not —

BLANKFEIN:  I’ll tell you, we get — we get a number of — there’s a lot of focus on New York billionaires these days.  But my favorite one is not running.

(LAUGHTER)

BLOOMBERG:  Compromise is not a bad word.  Compromise is what democracy is all about.  You get most of the people get a good percentage of what they want.  A handful of people on the two sigmas out get almost nothing.  And then that is the way we come together and move.

But let me just give you a thought, Stephanie, we keep thinking the wrong thing when we pick the elected leaders, particularly the Presidents of the United States, governors of the states and mayors of the cities.  These are not policy jobs.  These are executive jobs.  You have to pick somebody that knows how to run the railroad.

Making — blocking and tackling, making sure when you throw the switch, the lights come on and when you turn the faucet, the water comes out.  At the federal level, you have to make sure that we control our borders and we get the right leadership to get the right weapons for our troops and get great people to come and work as secretaries in all the different Cabinet offices.

Policy is terribly important.  But no executive — no president or governor or mayor can have all the policies themselves.  They’ve got to get people to come and help them formulate them on all the other topics.  That is what an executive does.

Goldman Sachs is a great firm not because Lloyd Blankfein makes the decisions, but because he gets the right people and he gets them to work together and he knows how to promote them and discipline them and pay them and whatever —

RUHLE:  But Lloyd Blankfein —

BLOOMBERG:  — that is what we need at the government level.

RUHLE:  But Lloyd Blankfein does not need to get those people who know how to run the railroad approved.  What we’re seeing happen with —

BLOOMBERG:  That’s part of the job.  That’s part of the job.  You can’t blame — the executive’s job is to bring along the legislature.  I don’t want to use the word manage because they have their own third of the government, if you will, of power.  But it is the executive’s job to explain to the legislators why his or her policies are the right one and bring them along.

You do not go and do a poll and ask the public what they want and then try to take them there.  That is leadership from the back.  You are elected to go and to say this is what I’m going to do and convince people to come along with you and have the horses to get us all there.

RUHLE:  But does it not disappoint you, given what populist opinion is, there are qualified, talented people who could be going into government and they cannot get confirmed into those positions because of this bifurcation?

BLOOMBERG:  OK.  But you know, that is the executive’s job, to get Congress to come together.  You trade, you bribe, you threaten, you cajole, you do all these sorts of things, the same way you run your kids.

You say to your kid, clean your room or you do not get your allowance.  You say to your kid, you do your homework or you cannot play Angry Birds.  You say to your kid, you’re doing a great job and let’s just do more of it.  I’ll help you.  I’ll work together.  People interact on a lot of different ways.  And it is the executive’s job to do that with Congress as well.

So I’m a believer that our Congress has been fractured for the last 239 years.  It has always been very extreme left, very extreme right.  These parties have changed their views and their consistency from one side to the other.  We forget history so quickly it changes.  But they’re still there and that is what an executive should do.

And when you’re looking at a presidential candidate, what you should do is figure out who will be able to do the blocking and tackling an attract good people.  Because that person is not going to make all the decisions and if that person does try to make all the decisions, then you really have a problem.

BLANKFEIN:  There’s a cycle in politics also like there is a business cycle.  Things get all tied up and politics are poisonous.  And people are now saying, gosh, it has been horrible and it’s never been this —  and of course, it was.  We’ve gone through — how many say it’s never been this bad in the United States getting things done?

I said, you know, pointed out, you know, by the way, we did have a civil war.  It has been bad and even more recently.  We had the McCarthy Era.  We had other kinds of eras in this country.  And what will happen is there will be a cycle someone will run on.

And by the way, it’s not just the politicians’ fault.  It’s the electorate.  The electorate is putting people in office who appeal to them with the commitment to not deviate from an very, very extreme position.  That is impossible for the other person who goes with the opposite extreme position to compromise  on.  At some point, people get frustrated.  Nothing will get done and someone will come up with the novel idea of going to the voters and saying, if you elect me, I will get something done.

Even at the cost of only getting 50 percent of our agendas through, but at least we’ll get something through.

You know something?  That person will do well.  That will catch on like a new fashion.  And then the cycle will shift again.

RUHLE:  You talk about New York’s favorite billionaires.  You’re now on that list.  Would you want to get into government?  You talk about this from a very passionate place.

BLANKFEIN:  I’m on a lot of lists that I do not deserve to be on.

RUHLE:  Would you like to get into government?

BLANKFEIN:  You know something?  I have a great job.  And the job has with it a lot of interaction with terrific people.  And a lot of influence.  And a lot of participation in the forces that are helping to shape the economy.  So I love that.

Can you get that same satisfaction from government?  I think Mike has been successful in both areas.  And I bet you he had better influence through his position in the government.

When I think back, just small things, just changing the rules on smoking.

How many lives were saved by that?  People don’t talk about that.

I think it would be an attractive thing to do, but a very unattractive place to get to.

RUHLE:  Well, an unattractive place unfortunately to be from a reputation standpoint has been the financial industry.

What would your advice be, Mike, from a cultural standpoint?

Banks have made their way from the financial crisis to where they are today.  Goldman Sachs has put together their 10,000 Small Business Initiative.  We are celebrating the American dream right here in this building today.

Yet if I walk down the street in middle America and said, what do you think about bankers?

Still, the opinion is so negative.

How does that get changed, Mike?

BLOOMBERG:  Well, we have been throwing the money changers out of the temple since Jesus’ day, so this is not new.  Nobody likes the banks.  They get terrible PR.  I’m not sure if there is a way to change that, incidentally.  I think what they should do is be honest, finance our growth, be great corporate citizens, do the right things and not be too brash about bragging about it.  You have got to do it and just assume a lot of people will understand and just understand that they are never going to like this industry.

The pharmaceutical industry has the same kind of PR problem.

BLANKFEIN:  What have they done other than cure disease?

BLOOMBERG:  Right, yes.  I mean —

RUHLE:  Save lives.

BLOOMBERG:  Well, better living through chemistry.  We used to die at age 25.  Now we died age 85, they must have been doing something right.

(CROSSTALK)

BLANKFEIN:  — the pharmaceutical industry.

BLOOMBERG:  And look at — the banks have financed growth.  How many people today have an education, have food in their stomach and have a roof over their head?  A lot of that stuff comes out of this.  And you just have to learn to live with the fact that they’re not going to love you.

But deep down inside, do they really hate you?

A lot of it is creation of the press.  You hate bankers, don’t you, Stephanie?  That will get you a very —

(CROSSTALK)

BLANKFEIN:  — try to go for “like”.

But in the history of America, people do not like concentrations of power.  They don’t like concentrations of economic power in the — look, it took us — we went through the whole 19th century with an economic crisis every 10 years, even to have — even to get a central bank, a lender of last resort.

And so we do not like — people in this country just do not like concentration of economic power.

RUHLE: .  All right.  Well, today is certainly about doing the right thing.

Gentlemen, thank you so, so much, Lloyd Blankfein, Mike Bloomberg.

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