#473 — Money, Power, and Moral Failure

Sam Harris speaks with Lloyd Blankfein about finance, politics, and the state of American society. They discuss Blankfein's memoir, Goldman Sachs and its role as a market maker, the 2007-2008 financial crisis, the AI investment bubble, wealth inequality and the rise of trillionaires, the crisis of antisemitism on the left and right, Trump-era corruption and the post-truth political environment, the national debt, and other topics. If the Making Sense podcast logo in your player is BLACK, you can SUBSCRIBE to gain access to all full-length episodes at samharris.org/subscribe http://samharris.org/subscribe.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Speaker 00

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• 0:25Sam Harris?

  I'm here with Lloyd Blankfein. Lloyd, thanks for joining me on the podcast.

• 0:28Speaker 02

  No, thanks for having me, Sam.

• 0:29Sam Harris?

  So you've written a memoir, Streetwise, which is incredibly fun to read and an education for anyone who doesn't know much about finance. And I'm just, I'm going to ask you some questions about it. I mean, I especially am interested to understand the lessons we should have drawn from the 2007, 2008 financial crisis, which you steered Goldman Sachs through, which was high stress and high stakes, and an achievement for which you were both celebrated and vilified. So you have a very interesting story because you came up from, I mean, you were a Jew living in the projects. This is not a story that's often told about Jews these days, coming from basically nothing.

• 1:11Speaker 02

  We forgot to socially mobilize.

• 1:12Sam Harris?

  Yeah, yeah. But you went to Harvard and then climbed your way through all these, all the high-status rungs on the ladder and eventually were running one of the most storied financial institutions in the world and through periods of great stress. And you did that for 12 years. So it's a great story, much of which we will not touch on here. In no sense is our conversation going to be a surrogate for actually reading the book. So I just recommend people do that. But I want to use it as a lens through which to look at the present, because you obviously have a unique perspective on many of the things that ail us. I'm worried about things like wealth inequality and the dysfunction in our government and

• 1:52Sam Harris?

  hyper-partisanship and just how we should, if we can find our way back to something that seems like dry land in the near future, where the things are more, the news cycle is more normal.

• 2:04Speaker 02

  Normal.

• 2:05Sam Harris?

  Yeah. I mean, what is normal? We're a decade from normal. By my lights, but let's start with some just very basic things. I want people to know what you've done. What is Goldman Sachs? What had it just? I mean, people, I don't think they know the name. I don't think they know what Goldman Sachs does.

• 2:24Speaker 02

  Goldman Sachs said it is a financial institution. Think of it, it's a wholesale financial institution. So people really can't get a mortgage from Goldman Sachs or bank with it. There's no Goldman Sachs offices on the corner. We finance people who are looking for capital, people who want to build businesses. We also address the needs of people who have capital to invest. So this could be high net worth individuals. It could be institutions. It could be government sovereign wealth funds. And we try through our good reputation on both sides to marry people who need capital with people who have the excess capital. And in order to do that, you have to have cultivated, which Goldman has done for something over 150 years, a reputation

• 3:08Speaker 02

  for kind of being good at it, not always perfect at it, but good at it. And so we engage with pools of capital and engage with entrepreneurs. And who else needs capital? Governments need capital, municipalities, the federal government gets financed, people who go through IPOs. And so people in the audience will understand IPOs. That's a way of getting finance for a private company, going public and raising stock and bonds. And there's a lot of different mechanisms and instruments to do it. But basically, we're the bridge and the intermediation between people who have capital and people who need capital. And I'll say that there's another corollary. We're also a bridge between the people who have unwanted risk and the

• 3:51Speaker 02

  people who are willing to take on the burdens of that risk and get paid for it. And since those people don't always match up at the same time. We are a principle. We will take on somebody's unwanted risk.

• 4:03Sam Harris?

  You're a market maker.

• 4:04Speaker 02

  Until we could find somebody else who'll take the other side. And when they take the other side, it's usually not exactly the same thing. So we're very mathy and have algorithms to try to get something that's not quite like the other thing to be almost like it by, you know, buying a cocktail of things to replicate something else. I know this is kind of abstract, but we can get specific too.

• 4:26Sam Harris?

  Yes, that reminds me about something that you were specifically vilified for during the crisis, which was during the aftermath of the crisis, which seemed to turn on confusion around your role as a fiduciary versus your role as a market maker. I'm thinking of the John Paulson trade, which was shorting mortgage securities. And, you know, he made billions of dollars betting against the mortgage market. And you, you guys created that trade for him.

• 4:52Speaker 02

  Right.

• 4:53Sam Harris?

  But you had to find a counterparty on the other side of the trade. And then that was, you were, you guys were maligned as having basically knowingly.

• 4:59Speaker 02

  Pushed out into the world.

• 5:00Sam Harris?

  Defrauded some other client.

• 5:02Speaker 02

  Yes.

• 5:03Sam Harris?

  I mean, maybe it's just worth double clicking on, on.

• 5:06Speaker 02

  Sure. You know, it's easy. Look, anything that's resolved, nobody ever remembers not knowing it. So everybody knows that the, that the mortgage, you know, that mortgages were, you know, junk securities were bad and, you know, a lot of them never, you know, you know, turned out to be worth zero at the time. Some people thought it and other people thought the opposite, but nobody, nobody really knew. It's only in hindsight that people know. By the way, every time somebody tells me they know something, I ask them about something that's current.

• 5:32Sam Harris?

  How much are you betting on that something right now?

• 5:33Speaker 02

  As you say, it's a current. And so in that particular thing, you know, at those times, we had somebody who wanted to go short the mortgage market. And we had plenty of people who wanted to go because at that point they were very high yielding securities. And by the way, there was not widows and orphans on either side of the transactions. It was a big institution on both, on either side of it. And it was, and it was, you know, plucked up as an example of some of the things that we did. So there was a very well-informed institution that was dedicated to holding mortgage obligations. By the way, mortgages are securities. It's like, it's like a security that's a version of a bank holding a mortgage. Mortgage. So it's just owning a people's homes. And if people are going to default on paying off their whole mortgage,

• 6:15Speaker 02

  those securities become could become worthless. So people were betting that those securities would go back up in value. And other people were go were betting that they would go down in value. And what we, you know, our role in this is a market maker. People come to us and say, I would like this. I would like this risk. And then we sell it to them and we principle and we take that risk until we can scurry and find the other side. Or something that that's like it enough so that we could be reasonably hedged. And, you know, we've been doing that for about 150 years.

• 6:46Sam Harris?

  Right, right.

• 6:47Speaker 02

  By the way, that's what makes the economy and the market go, go on, go on.

• 6:51Sam Harris?

  This is the one thing that's sort of surprising and difficult to understand in reading about your experience during the financial crisis. Because you, you guys were seemingly alone among financial institutions, well hedged and actually fairly impervious to what was going on until you weren't. I mean, you, you had not, you, you were not exposed to these, these toxic assets in the way that many other big names were. And you're actually making money through the, the crisis. But then at a certain point, even you being totally profitable and not actually exposed to these toxic assets were at risk of going under. How is that? How does that jump?

• 7:31Speaker 02

  Everybody was at risk.

• 7:32Sam Harris?

  Yeah. So it's always so.

• 7:33Speaker 02

  No, everybody was.

• 7:34Sam Harris?

  Explain, explain how you go from, your house is totally in order from your, your house could be the next to burn down. What actually was.

• 7:42Speaker 02

  Oh, no, people don't.

• 7:43Sam Harris?

  What actually almost happened during 2007?

• 7:44Speaker 02

  Somebody, you know, when, when James Bond diffuses the bomb, no one will ever, you know, no one ever, you know, no one ever appreciates how close to destruction it was because it was diffused. It never happened.

• 7:54Sam Harris?

  Right.

• 7:54Speaker 02

  This was a situation in which everybody, all companies, especially but not limited to financial institutions, any, every, every company has to finance itself, has commitments, it has to honor. It's receiving revenue and it's paying out revenue all the time. And during a crisis like this. Everyone was suspect about the solvency of everyone else they were dealing with.

• 8:20Sam Harris?

  Right.

• 8:20Speaker 02

  And so what happens at that, so that happens is if you have an obligation to pay someone and he's going to pay you, you want to see your, you want to see the money from him come into you first before you pay. And you get a whole daisy chain effect.

• 8:35Sam Harris?

  Or the, or the money from somebody else.

• 8:37Speaker 02

  I somebody.

• 8:37Sam Harris?

  You're not going to pay anyone until somebody's paying you.

• 8:39Speaker 02

  So this is a market. So even if you're an industrial company, I'm getting, I'm selling cars, you know, to a, to a wholesale dealer. The money has to come in so I could pay the cost of my raw materials. Everybody's waiting to get paid first before they'll pay. And then it freezes up. And so what happens in a situation like that, which has happened periodically in history, which is why we have central banks and they're, you know, one of the roles of a central bank, and not just the US central bank, which is called the Fed, is to be the lender of last resort. If the world gets into a position where everybody becomes distrustful, and we're talking about sentiment. We're not necessarily talking about reality. We're talking about, remember the movie It's a Wonderful Life? If there's a bank run.

• 9:22Sam Harris?

  Yeah.

• 9:23Speaker 02

  You think of the depression, some of the institutions could have been solvent, but nobody could survive a loss of confidence. If people are unwilling to take your credit, then they make you have to pay before they'll pay you. And eventually everybody is left with an obligation they have to meet, but no money with which to do it. No liquidity with which to do it. And that's the situation that almost everybody could have been in eventually. And it would have been, to me, it would have been like Domino's. It would have been over time. And that was the crisis. Was it certain that that would have happened? No, but it was a much higher likelihood than anybody should reasonably want to go, go to bed worrying about.

• 10:02Sam Harris?

  How, how do you think, in hindsight, how do you think the government performed during that crisis? Did we cut a large enough check or should certain institutions have been allowed to fail that were propped up? Or I mean, what, how do you look at the moral hazard question?

• 10:16Speaker 02

  You know, I think at the time, again, there's two ways of answering the question, what you, you know, what would you have done? What would you have done differently with after acquired information?

• 10:24Sam Harris?

  Yeah.

• 10:25Speaker 02

  And what would you have done differently at the time that the other with your, you know, with your greater wisdom and competence that the people on the site at the time didn't do?

• 10:33Sam Harris?

  Yeah.

• 10:33Speaker 02

  I would say the people at the time with what was available did very well because it was unknown and unknowable. And we're again, we're dealing with the risk of a problem and not necessarily the certainty. And so they went into some wrong directions. They dealt with things in a gross way. Just let's bring it to something where that's more current in people's experience. Let's say the start of COVID.

• 10:55Sam Harris?

  Mm hmm.

• 10:56Speaker 02

  And you want to go and you're worried about, you know, worried about the economy getting wrecked. And so you come out with a stimulus plan and you're going to mail checks to people. If you had a few years to do that, you might design it so that you were only, you know, you're only sending checks to people who really needed the money. Better, there would have been less fraud. It would have, it would have been better targeted, but you didn't have the time and you didn't have the tools to be able to do that. So you say, you know, something, we're sitting here, we'll do a retroactive examination about it and we'll find 50 things that were done wrong. But really, can you say that the people at the time, the decision makers performed badly, given what they had to work with and the speed with which they had to execute?

• 11:36Sam Harris?

  Yeah.

• 11:36Speaker 02

  No, so I would say, looking back, things could have been done much differently. But at the time, and you know, I was present and watching, I think they did a very good job with, you know, with what was available at the, at the moment. And again, the exigencies of the moment.

• 11:51Sam Harris?

  Is there anything we learned from that experience that is setting us up to respond better next time? And the, what, the analogy to COVID, I find pretty depressing because my sense is that COVID was a dress rehearsal for something much worse and we performed quite badly. We drew many, much of the culture drew the law, the wrong lessons from the experience of COVID. And I feel like in the presence of a scarier pandemic now. We have a society that it will be less trustful of any public health messaging coming from institutions, harder to wrangle to solve various coordination problems. I mean, this is just my view of it, but I just, I just, I feel like we're somehow less fit for the next pandemic than we were before COVID. What do you think, what do you think we did?

• 12:36Sam Harris?

  In respect of the financial processes?

• 12:38Speaker 02

  These are parallel fields of human endeavor. They're not the same thing, but they rhyme. Basically, it's fundamental. We're dealing with human nature. The first reaction, an early reaction, was we should never, the economy should never have these risks again. And so, regulation was stiffened. Capital requirements for financial institutions were stiffened. What's the consequence of that? It means that some of the financial institutions can't do their job as well because they can't lend as much, they have to husband capital instead of, instead of lending it out and supply it. And over time, the regulators, there was such an antipathy towards what the, some of the regulators did at the time, again, with the benefit of hindsight, that they curtailed some of the powers of the people, of the regulators, some of the powers that

• 13:22Speaker 02

  they exercised to make judgments about who to save, how to give money, you know, how to distribute money into the economy and the financial institutions. And by the way, all of this is quite understandable that the reaction would be this way. But the effect of it is to make it possibly harder the next time there's a problem. Now, one would say, why would there be a problem the next time if you've put in all these instruments? Because over time, the stark discipline starts to erode. Also, you don't want to turn the country into, into the returns of a treasury bill. You want, you want animal spirits, you want people to take risk. So if you have, if you, if you prepare the world or the country to avoid the crisis

• 14:04Speaker 02

  of the century, or the crisis that you have 80 years, you'll lose 79 years of growth in between. Sometimes it just is going to be, there's a, there's a cycle to these things, and that will happen, and we could talk about the current, you know, environment of what the cycle is. But one of the things is it might be harder the next time. But there's a certain inevitability that risk will get taken and we will get and we will and we will not see it coming. Risk is risk.

• 14:32Sam Harris?

  Well, how do you perceive the current situation with the market and its connection, however tenuous, to the real economy and the level of risk we're all running, the possibility of a bubble, AI or otherwise? The, I mean, you can take any strand of this ghastly object, of the level of corruption in the government. I mean, the animal, there's definitely a lot of animal spirits of a certain sort to be seen.

• 14:56Speaker 02

  Right. And it's been quite growthy out there. And again, we can talk about the economy and the and the polarization and the fact that, you know, people with asset values are inflating and so people with assets are getting richer and people without assets aren't getting richer. So the gap between rich and poor.

• 15:10Sam Harris?

  Yeah, I definitely want to focus on wealth inequality.

• 15:13Speaker 02

  It's very hard to talk about a good economy when you know for more than half the people, it's not a good economy. And if you talk about the bad economy, you're missing the point because on a macro basis, the economy is doing well.

• 15:22Sam Harris?

  Right. Okay. So let's take it piece by piece. What most concerns you about the state of the economy now?

• 15:29Speaker 02

  Well, the, well, obviously, we're sitting here and, you know, 15 minutes from now, it might be resolved. But right now, the all eyes of people who are thinking about the economy going forward are on the Straits of Hormuz and the price of oil as a consequence of that. And that's, that's, that affects the price of oil, but it affects a lot of other things as well, because energy is an ingredient for almost everything.

• 15:52Sam Harris?

  Yeah.

• 15:53Speaker 02

  And I'd say the market is assuming that this will be temporary. By the way, even down to the price of oil. So the price of oil, as we sit here, is over $100 a barrel. And if you want to take delivery of your oil in the future, it's a lot less. It's cheaper because everyone's assuming that in the future, the price is going to go down because it's a temporary situation. The longer it goes on, the less temporary people will see. They'll get used to this happening and they'll know that there's not a rapid end. So that's a focus. If you pluck that away, so in other words, before we found ourselves in this situation, or assuming that this gets resolved quickly, the economy has a lot of tailwinds to it. A lot of tailwinds. You know, the equity markets are, have been very high.

• 16:38Speaker 02

  Interest rates are likely to come down. There's a lot of stimulus coming in terms of the tax bill that was passed. You could see, um, people are already witnessing the fact that people's refunds uh, from the government, from their tax refunds are higher. All that is pumping, is going to pump money into the economy. That's already going pretty well. And, um, again, growth is a little bit lower than we'd like it to be in the last reading, but still pretty high. Unemployment ticked up in the last reading, but employment and payrolls are still very good.

• 17:12Sam Harris?

  Hmm.

• 17:12Speaker 02

  Um, so you can find kind of problems, but I would say, looking at the situation, we were in a pretty good economy from a macro point of view. But now the economy has to do two things. This gets back to another point, which has to create wealth. It has to grow GDP, create wealth. And then it has to figure out a way to distribute that wealth created according to the values, you know, of society. And so people will argue that we, that we've done a lot better on the first part, creating wealth and still on a going forward basis, but for this oil situation, still on, on a good track and less good on the second part. And the second part is more, you know, the distribution part. And that's really, you know, it is limits to what financial institutions could do in that respect.

• 17:57Speaker 02

  That's really the job of the political sector to figure out how to distribute things.

• 18:01Sam Harris?

  Yeah, so we'll, we'll talk about wealth inequality. But I, I'm still somewhat mystified and skeptical about the connection between the market specifically and the rest of the economy or just the, the real world. I mean, so, because I, I watched the market get blown around by, you know, Trump's posts on Truth Social that seem quite, I mean, in many cases, obviously lies, right? And yet the market draws immense enthusiasm from them. It literally, it'll move by, you know, four percent in the day based on something that he's tweeted, you know, a ceasefire with, that no one should believe in. Or take the, I mean, perhaps even a more egregious moment was during those, you know, his tariffing of every member of our species.

• 18:43Sam Harris?

  On Liberation Day, so-called Liberation Day. So he introduces this massive uncertainty into the global economy. And then he repeals a little bit of that uncertainty by saying, oh, that this.

• 18:55Speaker 02

  And everybody's grateful.

• 18:57Sam Harris?

  And everyone's so grateful that the market is telling us that everything is better than it was before he did this stupid thing.

• 19:04Speaker 02

  The relief is so, is so much greater that everybody doesn't.

• 19:07Sam Harris?

  Yeah, but clearly there's still more uncertainty in the world than there was the day before Liberation Day. So how is the market aggregating the wisdom of the crowd here? And how is it not just become a meme stock?

• 19:19Speaker 02

  They're different. They relate into, they relate to each other over time. But what a market is trying to do is it's taking everything it knows and extrapolating it forever about everything. So if you change it like one degree, you won't notice that in the economy. But somebody who's trying to take all the earnings and discount it back to present value from infinity back to the present. It's a big, it's a big effect on a market, but really a small effect on the economy. Because the economy is a day to day thing and the market is trying to look at all the future possibilities and discount them back to the present. I would say they shouldn't ignore each other, but they could, they could go apart.

• 20:02Speaker 02

  And also, the market is also sentiment.

• 20:06Sam Harris?

  But don't you worry about the, the uncoupling of any kind of rational sense of, let's say, the price to earnings ratio of many of these companies and their market value? I mean, what does it mean to have a, you know, a 300x, you know, price to earnings ratio? I mean, it seems like it used to be that 30 was high.

• 20:24Speaker 02

  No, it was high, but when people, and by the way, I am not the market. I don't own the market. I am a slave to the market like anybody else. I'm trying to figure it out also. But when somebody has a 300 times, trades at 300 times their earnings. People have to be thinking, and they are thinking, that it's not going to be 300 times, that it's that next year it's going to grow 100%. The year after that, it's going to grow 100% or 90%. That's the that's the element of this growth. And so people are extract again, once again, the market is extrapolating, is discounting the future into the present and saying, yes, it looks like 100 times earning now. But at this price, five years from now, it'll be 12 times earning. The price isn't even going to go up from there.

• 21:06Sam Harris?

  But we do have this phenomenon of a meme stock, which looks irrational in both both in hindsight and foresight.

• 21:12Speaker 02

  There's nothing positive you can say about that.

• 21:14Sam Harris?

  Right, but it feels like culturally, there's a little bleed through from those moments of just sheer. I mean, it's not even a bubble. It's just just irrational gambling behavior.

• 21:25Speaker 02

  Yeah.

• 21:25Sam Harris?

  To what the market is respectable market is also doing. It's it's looking more and more like a casino.

• 21:33Speaker 00

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• 21:41Sam Harris?

  I've had the sense that the pitchforks are coming, and we're now living in the age of soon to be trillionaires. Elon might be there in a few months. It's ultimately going to be disastrous politically.

• 21:51Speaker 02

  Are we in a like just a total post-truth world? Is it like a mortal life that once truth is killed, it's dead forever?