Uncertainty and Being Prepared

These are extraordinary times. But how extraordinary? No ones knows, and no one will know for quite a while. That is unsettling, and when uncertainty arrives on the doorstep of financial institutions and a family’s finances, anxiety blooms like a fungus. We don’t know what is going to happen, but we’d better have thought about and drawn up plans for just about anything.

 
 

These are extraordinary times. But how extraordinary? No ones knows, and no one will know for quite a while. That is unsettling, and when uncertainty arrives on the doorstep of financial institutions and a family’s finances, anxiety blooms like a fungus.

We know change is happening all around us. It seems manageable, seems gradual enough. But in this kind of environment, change can suddenly accelerate, swiftly turning the known to the scary. Look at Enron. One month it’s the seventh largest corporation in America, and within weeks it is virtually worthless. Tens of billions of dollars evaporated.

We don’t know what is going to happen, but we’d better have thought about and drawn up plans for just about anything.

Beyond the Numbers and Talk
It would be easy enough to whistle in the dark, or even to deny darkness. Credit union numbers look pretty good. Share growth is healthy; ROA is good.

In addition, the media accentuates the positive even as it reports the country is in recession. The media seems to be acting as if it is their patriotic duty to display optimism, to suggest that an economic recovery is going to be both sure and swift.

Wall Street has been touting the economy also, looking to the good news rather than the less welcome. But their talk is beginning to ring a bit hollow. If earnings looked bad, stock prices might head south for quite a while.

There could be much more to dread than the media and Wall Street let on. We are in recession despite the fact that consumer buying is fairly strong. Historically, consumers lead the way into recessions. That has not been the case here, but now consumers are showing signs of flagging. What would happen if consumers changed their habits and slowed their purchasing? Troubles could steamroll. After all, the U. S. economy has been growing for 10 years, and many of its citizens have not had much experience with retrenchments.
Thus if you buy into the notion that consumer confidence is what is going to keep the recession mild, then you also have to accept its opposite, too, that if consumer confidence declines markedly the recession could be severe, indeed that it could erode so fast panic could set in as it did in 1929-30.

Credit unions should be especially careful in these times. Not only are they, as the rest of the country, moving through the first recession in a decade and thus in somewhat unfamiliar waters, but they also have not faced a systemic shock in 20 years, back in the bad days of the early 1980s.
It is as if we are walking through a fog. The path ahead may be smooth, but on the other hand it may be quite dangerous. We just don’t know.

Potential Trouble Areas
As a manager, here are some other things that are troubling me. One is the decline in borrowing, which is the main source of our revenues. Another is the increase in bankruptcies and delinquencies. Thus the income side of our balance sheet is under pressure. We are responding to lower loan income at least in part by raising some fees. But delinquencies are much more difficult to manage directly.

I’m also worried about the efforts of some institutions to buck up sales, notably auto companies offering 0% financing. This indeed brings in buyers, but it robs the economy of buyers in the future, and it lures in buyers who otherwise would not have dared buy, who may be high credit risks.

I worry about how, owing to revenues coming under pressure, we respond on the spending side. In corporate America, the response is to lay off employees and shut factories. That is not our way. Here at Patelco we are responding with a hiring freeze and renewed efforts to increase productivity. (In fact, we plan to open new branches, using existing employees more effectively. We feel that it is very important to maintain, and increase, our convenience network.)

I worry about deflation, which is already taking hold in some parts of the economy and some parts of the world. In the 1930s, 65 percent of asset classes devalued. If devaluation arises, whole classes of collateral decrease in value. Any sort of increased borrowing by members might be harmful to them, because they would be paying off in dollars more valuable in the future than at present. If deflation arises, one of our best courses might be to orchestrate a huge education among members on how best to accord their finances, including trimming their standards of living.

I’m worried about a flight from stocks into the kinds of quality savings we offer here at credit unions. If we did get a flood of new money, would we be able to earn on it enough to cover what we would pay on it?

Being Prepared
As credit unions, we’ve done well over the last ten years. We’ve looked out ahead, maintained a vision and worked well toward that vision. Now is not the time for a retrenchment but rather a time to make sure the ramparts are manned and the dikes are sound. We have to be prepared to take blows from any quarter and to come back with resilience.

The same is true of working with members. We should be striving to assure that they are secure, that they will have means and resilience in the months ahead. If we do this, we both help them and help ourselves as credit unions.

 

 

 

Feb. 18, 2002


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