By Another Road...

Credit unions can demonstrate again their economic leadership and they can show the public and Congress the wonderful congruence of interest between members and their financial organization.


"Life, liberty and the pursuit of happiness" — everyone is familiar with the Declaration of Independence's promise. Indeed, many people believe that somewhere in the nation’s founding documents are laid out the means to achieve that promise. They often assume that the ordained means to the Declaration's goal is entrepreneurial capitalism, for that is the dominant secular ideology today.

The "pursuit of happiness" has turned into the "happiness of pursuit." But in 1776 when the Declaration was signed, America was largely an agrarian country of small farmers and merchants. The capital that built America's major industries, and later its railroads, came from overseas. America's promise has been to unleash human potential (as opposed to capital potential) in ways never before envisioned. This included removing arbitrary and unjust constraints placed on individuals owing to race, class, ethnicity or belief. Our nation's destiny is to allow all its citizens to realize their God-given potential and to seize opportunities life brings individually and in community. This, not entrepreneurial capitalism, is America's great achievement.

The Obama Administration is tasked with this original promise at a time when the accepted means and theories of the post-World War II market economy are under review. Many of the pillars of the capitalist system are now, or want to be, beneficiaries of government loans or capital injections. The search is on for new organizational models to replace the "flawed" privatepublic structures of Fannie Mae and Freddie Mac.

All of this activity is triggered by the prospect of an economic recession that could be second in severity only to the Great Depression of the 1930s.That economic cataclysm spawned many of the government initiatives now in place: deposit insurance, Social Security, the farm credit administration, the TVA and the federal credit union charter in 1934. What creative institutional solutions will be spawned in this economic crisis? How will the cooperative, financial model fare in this reassessment of our national economic structures?

Bankers: Not a Lovable History

Credit unions, sometimes described as "people’s banks," follow in a long and much debated history about the appropriate role of "money lenders." A Rembrandt painting titled "Christ Drives the Money-Changers from the Temple" captures the anger of Jesus literally striking at the "foreign exchange" traders at the Great Temple in Jerusalem. In both Christian and Muslim traditions, lending money at rates of interest – usury – has been prohibited. Work-arounds were developed, but the social antipathy to lending, or finance, has remained a part of many cultures. From Dickens’s "Bleak House" to the movie "Mary Poppins", which included a run on a bank, the role of financial services has always been viewed with ambivalence, if not periodic hostility.

The distrust and opposition to a National Bank defined a major difference between America's early political parties for almost a century. The recurring financial crises of the 1800s and first decade of the 20th century finally resulted in the establishment of a central bank in 1913, the Federal Reserve System. But the concern expressed by President Thomas Jefferson in 1802 still has animated political rhetoric to this day. "I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered."

In 1934, drawing upon Rembrandt's image, Franklin Roosevelt in his March 4, 1933, inaugural address, proclaimed: "Yes, the money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit."

“More Noble than Mere Profit”

One year after these thoughts were stated, the Federal Credit Union Act was passed. Today's circumstances again raise the challenge of defining how the cooperative model will apply these higher social values to a new era of problems. The challenge is acute because, while member-focused, one aspect of the cooperative evolution has been to duplicate the operational methodology of the banking industry.

Even today, some leaders are equating credit union circumstances with the banking industry by lobbying for TARP or other taxpayer assistance, with the simple logic that because the banking industry received assistance so should troubled credit unions. But cooperatives have always had a different logic and approach to difficult circumstances.

Walking Towards Problems

Cooperatives arise when market solutions are unavailable or impractical, or in response to an imbalance of economic power. Credit unions were formed to overcome the inevitable conflict between the interests of customers and of the stockholders of financial firms. In private companies, one of the opportunities is the ability to leverage the interests of stockholders and their manageragents against their customers. At critical points in time, the interest of customers inevitably becomes secondary to those of the owners and managers. Because this distinction does not exist in a cooperative, credit unions can walk toward their members who are having difficulty.

This freedom from conflict between customers and owners not only occurs when helping individual members who face hardship, but also applies to credit union cooperative solutions. From the smallest local CUSO to the ones with national reach, and even to the regulatory resources of the CLF and NCUSIF, cooperatives have funded their own solutions for collaborative assistance for both good and bad times. Market pressures to meet growth or earnings goals are replaced with patience and persistence to develop the best outcome for meeting members' interests. In essence, cooperatives are created to solve problems, not walk away faceless and blameless when market failures occur.

These solutions are not met to satisfy some vague "market expectation" but rather to enhance the long-term well-being of the member-owners. A current example of this is the Invest in America partnership by which credit unions, their members, and GM-Chrysler dealers create a win-win-win solution to finance autos at exceptional value. The Corporate Network today faces multiple challenges that in a purely market-driven model would be resolved by one of two methods: 1) sell the depressed securities and spread the loss around, or 2) somehow force participants to raise more capital.

Instead, owing to its memberfounded organization, the Network has cooperative options for restructuring that can lead to future solutions not feasible today. Because corporates are run by their credit union peers, they are responsible for more than market results. They are answerable for the alignment and interactions with members, a linkage that creates a long-term foundation of trust.

The Overwhelming Need — A Refinancing Tsunami

Public policy today is dominated by one concern — how to restore confidence in credit markets in order to restart the economy. Credit unions’ primary purpose is lending. In 2008, during the worst credit failure in institutional and individual memory, credit unions continued to extend credit. As the Federal Reserve lowers borrowing costs even further for mortgage credit, the nation is on the edge of a national refinancing tsunami of real estate loans.

Credit unions can demonstrate again their economic leadership and they can show the public and Congress the wonderful congruence of interest between members and their financial organization. For credit unions can pass the benefits of these historically low rates through to members rather than trying to shave off spread to enhance stockholder return. These actions build trust. This trust allows people to live in hope and confidence that the credit union will be there in their pursuit of happiness.