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 familys 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 its the seventh largest
corporation in America, and within weeks it is virtually worthless.
Tens of billions of dollars evaporated.
We dont know what is going to happen, but wed
better have thought about and drawn up plans for just about
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
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 dont 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.
Im 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.
Im 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?
As credit unions, weve done well over the last ten years.
Weve 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.