I believe that we are at point of recognition, a point at which we can see some developments ahead. At such a point of recognition, we had best consider what nasty shoals might lay in our course and how to avoid the worst of them.
What I see is that there are tougher times ahead than we have been used to in the past. I think our members as individuals are going to be squeezed, our economy is going to be squeezed, and both of these “shocks” are going to ripple through both individual credit unions and the whole credit union movement.
2005 was the first year since the Depression that Americans spent more than they earned. 2006 is likely to duplicate that grim fact. The Greatest Generation, the last generation really to be concerned with “putting away for a rainy day” is passing on. What is left are generations more intent on quicker gratification, borrowing if they have to, and even going into bankruptcy if need be in order to “have it all, have it now and have it deluxe.”
Where they pick up this attitude is not difficult to detect. The whole culture is living beyond its means. We are running up huge federal deficits, spending lavishly on Medicare, borrowing vast amounts of money from China, and importing a large proportion of our oil. We’ve spent a fair chunk of our real estate equity to support current needs and taken on risky mortgages to make it all work.
All this is going to impact members, some of it sooner, some of it later.
With debt rising faster than incomes and plateaued to falling real estate values, members probably will not bring fresh money to credit unions any time soon; share growth is going to be difficult. If credit unions want to keep lending, they may have to borrow funds to do so, and that is going to be expensive. If they don’t want to borrow, they will have to attract funds with higher savings rates, putting more pressure on their earnings.
Credit unions – especially ones with indirect lending programs, partnerships with retailers, promotion campaigns for real estate loans and the like – should look to all of their funding sources, including the federal home loan bank, the corporates, wholesale funding and loan participations.
Stress will show itself first on the weakest. These will likely be the smallest credit unions, the ones with the fewest resources and least diversity.
The Movement Squeezed
Ripples of stress working through members will work through credit unions and then through the movement. Of the financial services industry, we are the smallest and the one that most serves the persons of middle and small means. Large banks can more easily sustain themselves in a storm.
Liquidity could be a problem. The corporates are not bad at moving liquidity from Minnesota to Texas, but what we are more likely going to need is liquidity moving from the 300 large and growing credit unions to others of the 6,000 that are losing market share. But would the 300 lend to such credit unions? Would they rather not lend to their own members, whose creditworthiness is arguably greater?
So as we enter this period of economic uncertainty, we had better be alert. We had better be nimble. We had better be ready for anything. We don’t know yet what the developments are going to be, but, by being vigilant, hopefully we can respond more effectively for our members, our credit unions and our movement than if we believed that shielding our eyes and relying on standard procedures was our best course.
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