Blankfein, Simpson, and Bowles Call for Action on Nation's Deficit: Complete CNBC Video and Transcript
LIESMAN : Welcome back to our exclusive interview with Senator Alan Simpson, Erskine Bowles of the Bowles Simpson Commission, and Lloyd Blankfein of Goldman Sachs. Lloyd, before the break, you— we were talking about the negative implications of not solving—
BLANKFEIN : A failure.
LIESMAN : — the fiscal cliff problem, a failure. What are the— what's the upside?
BLANKFEIN : Look, the predicate of United States strength and influence in the world is a great economy. We have a huge opportunity. There are a lot of things that are t— turn very favorable for us. Demographics have turned favorable to us, the technology industries that we're strong in, and most importantly and most unforeseen, the energy situation in the United States. So getting— it's not just— you know, Simpson-Bowles and getting our— our budget in order is fine. But there are other things like energy, too, which we have to sort out, which if we do— we'll find the United States is in the best competitive position of anyone in the world. And the best competitive position we've been in generations.
LIESMAN : Erskine?
BOWLES : The big problem we have is how do we get there? As long as we have this huge debt overhang and as long as we don't bring our spending under control or increase our revenue, then we're not going to have enough resources to invest in education, invest in a high-value added research to invest in energy or infrastructure. You know, we— these— these are the problem areas that we have to face up to. You know, we spend twice as much as any other country in the world on health care. You know, health care is an enormous problem. It's growing at a much faster rate than GDP. Second problem is defense. We spend more than the next 17 largest countries combined on defense. Third, we have a tax code that is inefficient, ineffective, and globally anti-competitive. And fourth, you know, it's Social Security. Social Security is $900 billion cash deficit— debt— cash negative over the next decade. We've got to face up to those four big issues.
LIESMAN : Let me just be clear, though, because the head of the IMF, Christine Lagarde, was— out the other day warning countries against too much austerity. And—
BOWLES : Right.
LIESMAN : — also pointing out that countries who have done better are those who had a little bit less austerity. Is there a danger with what you're proposing that it's taken too religiously up front here and— and we end up plunging the country into recession?
BOWLES : No, because that's why— that's why what we did is we ought to— ought to phase it in over a long period of time. If you look at what they did in the U.K. compared to what we're doing, it's very similar. You know, we were one dollar— one dollar of revenue and $3 of spending cuts. You know, we wanted to go for a cost-benefit analysis for all the programs we do. You know, we raised the retirement age. They raised their retirement age. You know, we control the rate of growth of health care. But they're trying to get to balance in five years. That was too much, too quick. We recognize that. So what we wanted to do was phase ours in over a much longer period of time.
LIESMAN : But— Senator, it's hard to look at a 1.6 percent yield on the ten-year right now to see the money that floods into the U.S. treasury market, any time there's concern about anything in the world, and say, "You know what? The deficit's the big problem right now."
SIMPSON : Well, as Erskine often says, "We're the healthiest horse in the glue factory." Because the trajectory of debt and deficit and interest in this—
LIESMAN : Hold on, Erskine, do you really say that? Is that—
BOWLES : I actually say, "We're the best-looking' horse in the— "
LIESMAN : — or is that— is that a Simpson original?
SIMPSON : No, I've tainted him. Slowly over these last three years, I've tainted him. Anyway— the trajectory of debt, deficit, and interest in this country is exactly the same as the PIG countries, Portugal, Ireland, all of that, Italy, except we're lots bigger. And— and— and we— you know, all I know is this. There's a tipping point. I don't c— you don't care about whatever, you know, the big business world. He's the number guy, I do the color, but I can tell you. The tipping point is when the people who loan us money say, "You're addicted, obviously. You're $16 trillion. And so we're going to loan you more money, but we want more money for our money." And interest rates will kick up and— and inflation. And the guy gets hurt the worst is the little guy. What an irony.
LIESMAN : Lloyd, I want to get your— your take on this— 1.6 percent ten-year yield. Are people— are businesses concerned about the fiscal cliff? Or are they really long-term concerned about the deficit?
BLANKFEIN : Well, it's— if people are lending money to United— I mean, listen, would you lend money at 1.6 percent to ten years with someone with the characteris— the credit characteristics of the United States? Of course not. We're a reserve currency. People have dollars. Trade is conducted in dollars, pools of dollars. And they're financing us. And they're financing us with enthusiasm until the day they stop. And they don't— they don't— they don't blow a horn ten minutes before that happens. So we have to get ourselves— we have to get ourselves in gear.
LIESMAN : Does Goldman take action right now to prepare for that music— for the music stopping? Is it— do you protect yourself from that?
BLANKFEIN : Yes, of course. I mean, we live in— you know, we protect ourselves from much lower— you know, from very, very tiny— for very tiny probabilities. And that's not— there's a lot of things in the world. Look, we think— we have reason— we're optimistic about a lot of things. But we live 98 percent of our time in the 2 percent worst possibilities. And that's what we— plan and prepare for. Let me just say, on the last point, we— you know, we don't have a lot of room for maneuver, when our budget deficit is so big, to play Keynesian thing and spend a lot more now. At the same time, you don't want to have austerity tomorrow at a time when deficits are lowed and we're worried about deflation. There are some things that from a fiscal point of view, if they're not free, they're cheap. So phasing in tax deduc— tax— raises, where you don't have to have another voter down the road. Pha— phasing in caps on entitlements down the road, where they don't become implemented in the short term. Getting rid of some regulations and rules that are impairing people from investing v— vast pools of liquidity that are on the sideline, that are not owned by the government, that are theirs to invest but are just sitting on the sideline.
BOWLES : The r— the reason we have to do it, Steve, let me just give you the very simplest arithmetic. If you take last year, not 20 years ago or 20 years from now, but last year. 100 percent of the revenue that came into this country was spent on what's called our mandatory spending and interest on the debt. Mandatory spending is principally what we spend on Medicare, Medicaid, and Social Security. That means every dollar we spent last year on these two wars, national security, homeland security, education, infrastructure, energy, homeland security, every single dollar was borrowed and half of it was borrowed from foreign countries.
LIESMAN : Do you like the— Romney litmus test that he's going to take every program and see if it's worth it to borrow money from China?
BOWLES : Well— you know, that's— that's— a fun way to say it. But I think you should do a cost-benefit analysis on all the— all the money you're spending. You know, I can tell you— let me give you an example. You know, I just ran a university for the last six years. You know, I wanted to see if we could find a program to improve the quality of— of teacher education. We did. We found 82 of them. Do we need two or three good ones? You bet. We don't need 82.
LIESMAN : Senator Simpson— there are some Republicans who think we can get where we need to go without raising taxes. And some Democrats who think we need to get where we c— where— where we can go— we need to go without really substantially cutting entitlements. Are— are both of them wrong? Is one of them right?
SIMPSON : There are really not some. There are a lot of them. And— and— and they— you know, you have a situation where Grover Norquist has obtained this pledge in the '80s and the early '90s, he got this pledge that you wouldn't raise taxes under any circumstances, unless there's commensurate, you know, spending cuts. And those guys are in thrall to him. There are 82 guys in the House who didn't run to limit government. They came to stop it. You got the lefties saying if you touch anything in— in health care or any— call it anything, you're throwing old ladies off cliffs in their wheelchairs. And then you got the— the— the Republicans. But you don't have to raise taxes. You go into the tax code and you rip around in $1, 100, 000, 000 worth of stuff, which is used by only 20 percent of the American people. Only 27 percent of the American people—
LIESMAN : People who itemize.
SIMPSON : — itemize. So these— guys have never heard of it. But if you want to know about a stimulus like whether you're listening to Krugman or whoever, we do a pretty good stimulus. It's called the deficit. $1, 100, 000, 000 buck, what the hell do you think that is?
BOWLES : But— but the answer to your question is, we cannot solely grow our way out of this problem. You could have double-digit growth for a decade and that alone won't solve it. You can't solely tax your way out of it. Raisin' taxes doesn't do a darn thing to change the demographics of a country or the fact that health care's growing at a faster GDP And you also can't solely cut your way out of it, without hurting the truly disadvantaged or without making' such significant cuts in education and infrastructure, energy, and research, that we're not competitive in a knowledge-based global economy.
LIESMAN : Lloyd, we— we don't get to talk to you a whole lot. I want to ask you—
BLANKFEIN : Sure.
LIESMAN : 'Cause a lot of this is predicated—
BLANKFEIN : Can I just say one thing on that?
LIESMAN : Yeah, go ahead.
BLANKFEIN : Even if it's a matter of economics, you could live life on one extreme or the other. As a matter of political reality, you can't. We're having— the country is divided on this. Whoever wins the election, I hope they realize that you have to bring the entire country with you. And you have to do this in a bipartisan way or else we're going to be a very volatile system as we go from one extreme to the other extreme as the parties trade— tenures in office. Whoever does this is going to have to do something more in the middle, just so— the whole country can form a consensus and go forward. And I see with these two gentlemen here, you have such a great bipartisan spirit. After the election is over, whichever way it's resolved, I hope everyone takes that as a referendum that these questions are decided and that the winning party is generous enough and wise enough to realize you better take the other side with you or you can't—
LIESMAN : So let me just be clear about something on your— your personal views. Somebody comes to you and says, "Lloyd, you need to pay 5 percent more on— on your— on your income taxes, in order to solve the deficit." Are you— are you— are you in favor of that?
BLANKFEIN : Of course, to s— let me say— let me use my formulation. If you paid 5 percent more, you would solve the problem in a heartbeat. I don't know anybody who wouldn't pay that kind of price to benefit the— you know, the— you know, our country. The questions that come up, are people going to— the pressure that's put on people who would otherwise advocate tax raises is, "How would you spend it? And will this defer the hard choices that have to be made down the road?" No one is so unpatriotic that they wouldn't contribute a little bit more to resolve it. The issues is over what resolves it.
BOWLES : And you shouldn't pay 5 percent more unless you're willing to also make some cuts in the spending side. You know, we've got to put the fiscal house in order and just paying more won't get us to the promise land.
SIMPSON : And if you can't learn to compromise an issue without compromising yourself, you sure shouldn't be in Congress. In fact, you shouldn't even get married. If you
BLANKFEIN : By the way—
SIMPSON : And that's where we are. We're stuck.
BLANKFEIN : You shouldn't go to Congress needing to learn to compromise. P— politics is the art— the definition of politics is the art of getting things done. You should be elected for being willing and being able and capable of compromising in the first place. Just think of the pressure that was put on— Rahm Emanuel in Chicago for letting— for letting that teacher's strike go on for days. Could you— I mean, look at the pressure that was brought to bear on the unions, on the government. Look what we have at stake here in Washington for the whole country. Don't you think a little bit more pressure should be put on achieving a compromise?
LIESMAN : Lloyd, I want to stick with you, because I want to ask you a lot of this— of— of the outcomes we're talking about here predicated on economic outcomes. Give us your view of the— the U.S. economy and how concerned you are about what's going on globally— in the economies?
BLANKFEIN : I think there's a lot of issues in the world today and a lot of opportunities. I think for one thing, a lot of the context that drove the credit bubble in some ways and led to overleveraging— created bad values, but still are intact. So for example, you think of the demographics around the world, creation— wealth creation in China. They may have a bad year, but they're not going to have a bad century in China, in terms of wealth creation. You think of technology, other advances, the energy situation. I think— I'm very optimistic in the longer term. And there are problems in the short term. I mention China. I think that works through. But it might not in the short term. I feel more comfortable about fi— next five years than the next five months or the next year and a half. I think Europe looks much better than it did six months ago, but they have a lot of wood to chop. But I will tell you the big shock of a derailment of the Euro, I think the— the official sector did a good job of if not taking it entirely off the table, really relieving some people's short-term concerns as they muddle through. The United States actually, I think, has some of the greatest blessings around, except that— look, all the other problems in the world are real structural issues, China, the— the structure of the Euro. In the United States, a lot of our problems are self-inflicted and could be self-resolved. And by the way, it makes the long-term consequence in the judgment of history a lot more severe if we don't solve these resolvable problems.
LIESMAN : I'll just stick with you one— one— one more— one more— question here— Lloyd. To listen to the situation as laid out by— Misters— Misters Bowle— Bowles and Simpson— you wouldn't think we'd have a stock market at an all-time high. If things are in such bad condition, why is the market where it is? Is it— is it too lofty? Is it a bubble right now?
BLANKFEIN : For one thing, interest rates are so low that people are looking at equities as a high-yield asset class. People are looking at dividends that are much higher than the ten-year government bond rate. So that's one thing that's fueling it. I think you also have—
LIESMAN : You advise caution on that?
BLANKFEIN : I advise caution on everything. And not only do I advise it— not only do I advise it, I try to demonstrate it.
BOWLES : The— the thing that worries me is I think the market has priced in the fact that we're actually going to get a deal. They don't believe we'd be stupid enough to go over this cliff and have, you know, this economic crisis.
LIESMAN : Is that how you would bet, Erskine?
BOWLES : No, I'm really worried that if we don't get these guys to pull together rather than pull apart that we face not only the most avoidable company crisis in history, but we face the most predictable.
LIESMAN : Is that your bet, though? What is your bet?
BOWLES : I think we got about a 30 percent chance to get this thing done before the cliff. I think we've got about a 30 percent chance to get it done immediately thereafter. And we got about a 30 percent-35 percent chance—
LIESMAN : And Senator, where would you put the odds?
BOWLES : — that we won't get it done at all.
SIMPSON : Don't forget another antipathy that— that politician— doesn't— doesn't like or believe the business people and the business people don't like or believe the politicians. And that's historical. I mean, that's the way it works. I don't know what's going to happen, but I'll tell you, I think there are just roses out there on— in the stock market. You— they— they can borrow money for nothing. The stock market, as— as Lloyd says— you know— they can— money, the return, the yield— cash all over the place. And— and— and it's like the grasshopper and the ant. Only my grandmother remembers that. But I tell you, the indust— the industry— the guys who are working and putting to the side are going to make it. And the guys who are just whistling around like— I think in the market. And I'm not here to dampen that. But holy smokes, they really believe, honestly, that no Congress could be this stupid. And by God, they can.
BLANKFEIN : You know, one other thing on the stock market, you also have the Fed, you understand, who's basically saying there's a penalty for holding cash. And they're engaged on a policy to take up asset prices. And so— and it— and it's kind of ironic that money's leaving its equity market now and going into fixed income market at these very low rates. People may, in a bit, look back and wish they'd done the opposite.
LIESMAN : But Lloyd, there's— there's a school of thought right now that what the Fed is doing, buying— treasuries, enables the deficit spending that's going on in Washington. Do you subscribe to that?
BLANKFEIN : In part— of course. In other words, if people— anybody who—
LIESMAN : So should the Fed stop for that reason?
BLANKFEIN : No. I— I think the Fed is being very aggressive and, I think, courageous in doing what they can. There's very little monetary tools left. But, you know, they have a mandate. And they're deploying all that they have. But there's nothing that will comp— that will allow the Fed to compensate for— a total abdication by the people—
BOWLES : Of— of fiscal responsibility.
BLANKFEIN : Of fiscal responsibility.
LIESMAN : Erskine, give us— give us some numbers. What would happen to the total debt burden if either A) the Fed stepped out and— and interest rates and— and B) if interest rates normalize? How— how much lower is it now than it otherwise would be—
BOWLES : Well, I mean—
LIESMAN : — if we were a 3 percent economy?
BOWLES : I— I'll give you— I'll give you the greatest example. We're spending about $230 billion a year on interest right now. If interest rates were at their normal level, you know, at— the median level they were in the 1990s or the first decade of this century, we'd be spending about $650 billion on interest alone.
LIESMAN : So do you foresee being asked to be in a position to give that kind of numbers to the— president of the United States if you're asked to be treasury secretary?
BOWLES : N— no, I don't.
LIESMAN : You don't want the job or don't expect to be asked?
SIMPSON : You mean you wouldn't talk to them?
BOWLES : I expect to be living in North Carolina for the rest of my life.
LIESMAN : Well, you could do the job from there, couldn't you?
BOWLES : Well, if they'd move the Treasury to North Carolina, that'd be great.
BLANKFEIN : You didn't ask, but I'll pass on the job, as well.
LIESMAN : Okay, all right.
SIMPSON : You can't count me out. He does the numbers. I do the color.
LIESMAN : I guess that leaves me, right? Never mind. Lloyd, I want to ask you just quickly about Wall Street and what's going on. Their M&A volume not doing so good. And— and I— I understand, this is a fascinating fact that I looked up, when you did your IPO, you said a 40 percent return on equity. Now it's 5 percent. What's the right number?
BLANKFEIN : Well, I don't remember 40 percent return on equity. You know, we're going to have to let things sort out, as between the opportunity set and where regulation and amount of capital. You know, ROE is a matter of how much E you have also, not just the R, which are returns, how much equity. And that's not all sorted out yet. So we're going to have to— see that ev— how that evolves. I'd say for Wall Street, the things that Wall Street do contribute to growth but they're also dependent on growth. We advise companies who want to do transactions. We finance transactions. We help people manage risky assets. We hedge people who do economic activity. In a period of time when economic activity is slow, guess what, we're going to be slow too. As that speeds up, we'll speed up generally as some multiple of that change.
LIESMAN : Uh-huh. There's a book that's coming out that I think you are familiar with this book that's coming out by— a trader— an executive who used to work at— at Goldman Sachs, Greg Smith. How concerned are you about what revelations might be in that book?
BLANKFEIN : You know, I'm not really concerned about the revolu— revelations. I tell you, I'm not looking forward to the hoopla around it, if there's the hoopla that— that— greeted his op-ed is any indication. But there's not a lot in it to begin with. I haven't seen the book. And I haven't talked to Greg S— in fact, I never spoke to Greg Smith. But we went over everything like crazy. There weren't real sharp accusations. There were c— soft things like culture and things like that. But we surveyed his own reviews and what people said about him and what he said about e— everybody else. And frankly, we could find nothing. We had to report this to our board. And guess what? We're a highly-regulated company. The regulators were interested in this stuff. And we still found nothing of consequence. So you know, we'll take it, you know? And guess what? When we think about what's gone on the last four or five years, it will just go into the mix.
LIESMAN : I want to come back to some of these issues, but I do want to ask Senator Simpson, would you tell me if you had the opportunity to talk directly to Candidate Romney and Candidate Ryan, what would you want them to say? What would you advise them to say? What do you want to hear from the candidates in your own party when it comes to this issue?
SIMPSON : Well, I think Romney is right on track, when he starts to say, "I know how to govern. And you govern with the other side." And when he said during the debate that he— he was a governor of a tough state, you know? And he dealt with a legislature of 87 percent Democrat and he got things done. He did a health care bill, whether you like that or not. He balanced the budget. And people are thirsting for that. I tell you what they're not thirsting for, Erskine and I go around the country, they're tired of BS and mush. And they're looking for somebody to tell them the truth. And Ryan will do that. And Joe, I know— I know Joe very well. But I tell you, the reason they savage Ryan, he's dealing with the driver in the engine compartment that can wipe out America. And that's health care. You have— that's the engine. It's on automatic pilot. And it will suck up every discretionary part of the budget, unless you put the brakes on. And that's why they rip him.
LIESMAN : But Senator, I just want— I just want to interrupt you on that. Because it sounds to me like you are not displeased with what you're hearing from your candidates right now. And yet, we all agreed at the beginning that it was unbelievable they didn't bring up the deficit— Paul Ryan opposes your plan.
SIMPSON : I know it. And—
LIESMAN : He dissented.
SIMPSON : — so did the president. I mean, and everybody opposes— we've pissed off everyone in America. Nobody's doing anything for us.
LIESMAN : Well, at the risk of pissing you off, I mean, I just want to be clear here. I asked you to talk to Romney and Ryan. What would you say to them—
SIMPSON : I would just say, "Well— "
LIESMAN : — that you have concerns about.
SIMPSON : Tell them we have a leaderless government and they lead. They're govern— they can govern. This gentleman can't govern. He can't govern.
LIESMAN : Erskine Bowles.
SIMPSON : He's— he's doing politics day and night.
LIESMAN : Erskine Bowles, same question to you. If you had a chance to talk— to advise— Obama— Obama and Biden on what you want to hear about the deficit and— the fiscal cliff, what would you want to hear? What would you tell them to say? What are you not hearing now?
BOWLES : To lead, lead from the front. Let's just take on this— this— this enormous problem we have with economic growth. The best way to take that on is to reform the tax c— code, to broaden the base, to simplify the code, to wipe out these tax expenditures and use that money to reduce rates to encourage growth and also to bring down the deficit. Let's really attack these entitlement problems. Let's slow the rate of growth of health care. Let's slow it to the rate of growth of the economy. Let's really do something about Social Security to make it sustainably solvent. Let's reduce this defense spending. We can't afford to spend more than the next 17 largest countries. And then let's take that money and some of it invest it. And let's invest it in those things that America has to invest in to be competitive globally.
LIESMAN : Lloyd?
SIMPSON : I would say the same thing to the— to the candidate of my party.
LIESMAN : Okay. Lloyd, has— has Wall Street, has business done enough to push politicians towards better solutions?
BLANKFEIN : You know, the— the answer to that, of course, you've never done enough. And I think Wall Street has been— you know, business in general, Wall Street particular, finance in particular, has been— a bit under the gun. And I think some reaction and, you know, shame on us to some extent, has been to hunker down and keep our heads below the parapet. And, you know, something, we have a stake in this coun— country like everybody else. And I think we have the experience and the competence to give our— let people know what the consequences— the political sector will make these judgments and reconcile these different choices. But I think we have to get out there and explain what the consequences are.
BOWLES : Which is exactly what Lloyd is doing now. And I really thank him for doing it. It's the same thing that other CEOs are doing now, throughout the country. We've had about 75 to 80— Fortune 500 CEOs come together and form a CEO Fiscal Leadership Council to tell these members of Congress, "Let's face up to these problems." You know, like Lloyd said, "I'm willing to pay more taxes. But I'm willing to pay them only if we also put our fiscal house in order and do the smart, tough things on spending."
LIESMAN : Yes. Lloyd, one of the things the administration high school said is that they don't— they want to have a burden sharing, that they feel as if you have to charge wealthier people more money if you're going to cut back on entitlements which affect poor people— in— in greater percentages. Is that a compromise that you're willing to make?
BLANKFEIN : Sure, listen. You know, my politics— I— you know, I'm probably— you know, I'm on the left center side of things. I'm not— I don't mind paying higher taxes. I don't mind progressive taxes. But I would say there's— the economic system has to accomplish at least a couple of things. One is to create, generate wealth, and the other is to have a fair way of distributing it. I'd say the first is a pro— is a predicate for the second. I don't want to do anything—
LIESMAN : You have to have wealth to distribute?
BLANKFEIN : Right, I don't want to do anything in the redistribution that— that tamps down on the— on the generation of wealth.
LIESMAN : Well, one of the things that's been— criticized for not— for curtailing wealth generation has been regulation and even some of the lawsuits that are out there. There's been a lot of— pressure on Wall Street, a lot of— a lot of legal actions that have been taken against Wall Street— in the past, just the past several months. Do you think those are politically motivated?
BLANKFEIN : Look, it's a political process. So politics enters into everything. But there's— look, nothing would suit me more than for all the leg— legacy issues fade away. But you know something? The country went through a big trauma. We're a democracy. In some cases, it's an— you need an escape valve for it. So I accept the fact that we're going to have to deal with legacy issues. But I would like to spend a higher proportion of our time dealing with the future and with the current problems we face.
LIESMAN : I want to see if I can get one more aphorism out of— Senator Simpson here. I know we have to go.
SIMPSON : Aphorism?
LIESMAN : Maybe that was the wrong word. When we're back here a year from now, are we going to have a debt deal on the table? Is this country going to be well along towards solving the fiscal problem or is it going to be worse?
SIMPSON : It's going to be you betcha. Because the— the— the axe is going to swing. And the club is going to come down. And people are going to say it to their elected representatives, "Look, I had to pay more interest because you guys didn't do anything. I'm getting it stuck right and left. And you did this to me. And now go correct it."