One More Time ... or Why Cooperatives Work in Economic Crises

If there were no economic cycles and markets function fairly for all situations, there would be no need for credit unions.


If there were no economic cycles and markets functioned fairly in all situations, the need for credit unions would not exist.  But markets don't always work or treat people fairly.  The current economic turmoil, now impacting all levels of society from the individual consumer on Main Street to the financial giants of Wall Street, is why credit unions came into being and continue to exist. 

Thanks to the cooperative form of organization, credit unions can venture where private firms cannot, using capital in the form of shares raised and loaned to a defined group.  There is no significant structural flaw in the credit union model.  Contrast this to Treasury Secretary Paulson's recent description of the main reason behind the GSEs’ failure: trying, and ultimately failing, to achieve two conflicting goals at once – attempting to satisfy both shareholder profit expectations and disparate customer needs.

Moreover, credit unions don’t rely on sales to secondary and wholesale funding sources to replenish their funds.  This means we can continue to lend when bank credit channels, financed via wholesale and secondary markets, seize up.  The dilemma of jumpstarting frozen credit is at the core of the Federal Reserve’s and Treasury's multiple challenges today.  That is, the Fed is sailing into unfamiliar waters, confronting the quite different and greater challenge of inducing borrowing and lending rather than moving to rein in overheated credit markets.

Liquidity Flows Among Credit Unions
Credit unions have no such jarring dilemma.  Lending to members is our core activity.  Any excess liquidity goes largely into the Corporate network, which cycles these funds back out to other credit unions in need of capital.  A complete, well integrated system is thus created and functions smoothly.  

A key phrase surfacing in many damage assessments is that it is now time to get "back to basics," a code phrase for “doing things right.”  The credit union industry has, in virtually all instances, continued to conduct business adhering to these basics, the reason behind total loan originations exceeding $180 billion so far in 2008.

When Will this Crisis End?
So when will this crisis be over?  No one knows, but I suspect the efforts to engineer a solution through legislative packages, infusions of government capital, and other master plans may be promising a somewhat optimistic fix.  The crux of the real estate crisis, in terms of home value, foreclosures and market recoveries, is playing out as an intensely local event. 

I was reminded of this last week while buying gas in three states over three days.  The $4.00 gallon of gas is no more.  In my home in Bethesda,MD the least expensive was $3.57 a gallon.  In the Dallas area, I paid $3.35 and in central Ohio I saw gas for $2.76.  Yes, I know state taxes and transportation expenses do make a difference at the pump.  But there are other local differences, reflecting a confluence of factors within local markets.  

Four months ago, the pundits were taking odds on an unprecedented $150 for one barrel of oil, not today's level now nearing $80.  In a similar vein, I suspect this is how the real estate "crisis" will play out, with the trough bottoming out at different levels in different markets.  Then, stabilization of activity will play out at varying times for different places around the country. The common underpinning for success is patience and the ability to forge ahead, continuing business as usual.  And that is exactly what credit unions are able to do, because they are cooperatives, time-tested to do just that.




Oct. 13, 2008


  • I’m not as convinced as Mr. Filson that the credit union model and its culture have inherent strengths that can be leveraged in the current crisis. I would rather bet on the intelligence and talent of many of the people involved in credit unions. I feel very confident that the many smart people out there running credit unions will customize solutions that work for them locally. I don’t think that there will be a universal solution that will work for everyone. Consider it a variation on “think globally, but act locally.”
    Marvin Umholtz
  • Very well said Chip. I truly believe that to a very large extent, the vital role that credit unions play as trusted,professional and personal financial institutions is becoming much better known,valued and accepted in the marketplace. It is a darn shame that it takes a financial crisis originated by others not so trustworthy to make that happen Now, we just have to have congress listen as closely!
    Mike Mastro