The economic crisis is over. But the recovery is moving slower than predicted and the country needs to put people back to work.
During the Great Recession of 2008 and 2009, only three consistent institutional providers of net credit to the economy existed:
- The federal government in direct Treasury, Fed loans or government guarantees
- Warren Buffett’s Berkshire Hathaway Group
- Credit unions: $272 billion in loan originations in 2009, up 7.2% over 2008’s record level
Credit unions have demonstrated the ability to provide a countercyclical solution to financial market challenges.
The recovery is constrained because consumers are still caught in a "deadly grip of debt," according to the New York Times. Over-committed borrowers cannot spend more, let alone borrow more. The $11.9 trillion debt hangover has driven consumers debt-to-income ratios to all-time highs.
The Uniquely Credit Union Role
Corporate America has aggressively financed its short- and long-term debt since the recovery began in mid-2009 by taking advantage of the lowest interest rates in memory. These interest savings pass through to the firms’ bottom lines. The average consumer, however, has not had the same opportunity. Few financial institutions want to exchange a higher yielding, paying loan for a lower yielding one. Why disintermediate the assets on one’s balance sheet and lower earnings, especially with the pressure to modify terms on customers who are having trouble paying?
In a September 4, Wall Street Journal article made two points:
- Lower dollar LIBOR rates should be a boon to markets and the economy.
- The combination of low borrowing rates and a huge stockpile of cash should be tinder for a wildfire of economic growth.
Investments at credit unions total more than $310 billion out of $916 billion assets. Credit unions currently have $574 billion in outstanding loans, including 13.2 million credit cards, to 45.7 million borrowers.
Every time a credit union modifies a member’s loan and reduces their payments, it puts immediate cash into that member’s hand month after month. The member will put that money toward savings, use it to pay down debt, or re-invest it in additional debt such as a new car or a home-remodeling project. This kind of economic boon is direct and immediate, and when it is repeated hundreds, thousands, or millions of times throughout a community or region, it puts demand back into the economy. Demand is what causes employers to order more, increase hiring, and invest in growth; these are the keys to accelerating America’s slow recovery.
The process is happening now credit union by credit union, member by member. The data is coming in. Mortgage pipelines are filling. Refinancing demand (80% of total) is getting close to the record levels of the first quarter 2009.
On average, credit unions lowered their credit card rates to around 10% on June 30, 2010. Banks have raised rates to close to 15%. This five-percentage-point savings puts an additional $50 million of spending capacity over a year’s time for every $1 billion of card debt outstanding.
A Callahan employee asked to refinance his first mortgage at a credit union; the credit union responded with a no-cost, no-fee modification to a 3.75% 5/1 ARM. That lower rate added almost $1,000 each month to his household’s cash flow.
Setting these financial sparks is what credit unions do. The focus on members and long-term relationships encourages proactive initiatives for existing and new members. These actions also benefit the credit union. Even at lowered rates, the increased yield on new loans over short-term investments is 3-4%. If $100 billion of current investments were converted, this increase would add $3.5 billion in total revenue over a year. Most of the increase would go directly to the bottom line.
As credit unions facilitate consumer access to historically low rates, their collective action addresses the three big issues facing the country:
- Converting idle economic resources into cash flow that directly benefits consumers, which in turn strengthens confidence, a critical factor in a faster recovery and job growth,
- Demonstrating that actions by market-facing firms can be immediate, direct, and that government intervention, required in the crisis phase, can now be drawn back,
- Highlighting the critical counterintuitive role credit unions perform in the economy, a fundamental part of their social compact. Doing the right thing for the member is credit unions’ sole reason for being. They are different by design.