MADISON, Wis.-The near-trillion-dollar investment by the federal government in the U.S. financial system was the right move, but it won't stave off an ongoing recession in the near-term, according to a survey of credit union economists. What's having an effect on CUs and their members is a "de-leveraging" of significant debt that won't be resolved until a troubled housing market gets back on its feet, those same economists told CU Journal, noting the current scenario is rewriting some long-held economic views.
Credit unions, which tout their member ownership, now have distant cousins in at least nine major banks, including JP Morgan Chase, Citigroup, Goldman Sachs, Wells Fargo and Bank of America, which now have taxpayer ownership following the injection of $250 billion in equity directly into the market by the government.
What all of this has led to, agree members of the Credit Union Economic Group (CUEG), is a prime opportunity for credit unions to capitalize on the big banks' fall from grace and the ongoing recession, which will be painful but not a repeat of the 1930s.
"This is not the Great Depression, I am so sick of those comparisons," said Dave Colby, chief economist at CUNA Mutual. "This is a wringing out of excesses and this is the first time we have had to wring out leveraged excesses."
Added NAFCU's Chief Economist, Tun Wai, "In some sense credit unions are still very strong, still well capitalized. They are calmer waters as opposed to other financial institutions that are seeing so much trouble."
Wai sees an ongoing process of de-leveraging as massive debt accumulated during the housing bubble is written down. Still, in Wai's view, while the Fed's intervention is an attempt to stave off a serious recession, the government's involvement makes the situation murky for investors and consumers alike. Nevertheless, Wai believes the $700-billion rescue plan was necessary when the case-by-case containment response failed to work following the collapse of Bear Stearns, Lehman Brothers and AIG. "Really what they found out is that it is a systematic question, and it is not just the system here domestically but internationally," he said. "That kind of problem needs a systematic response. What we are seeing now is international coordination of policy in terms of addressing the problem systematically."
The "first domino," of course, was knocked over by the housing bubble, which hit once red-hot markets like Nevada, California and Florida hard. In many of those markets foreclosures continue to increase. Terrin Griffiths, an analyst for the California and Nevada Credit Union Leagues, said that everyone knew a correction was looming, but the reach of the housing market's downfall was significantly underestimated. "I can honestly say that I didn't see this coming as severely as it came," she said.
Some lagging indicators, including unemployment and GDP, have remained respectable, but CUEG economists expect that to change in a hurry. Wai sees negative growth for at least the next two quarters; a development that promises to bring a sour Christmas if pink slips start to fall like snowflakes. But those numbers will likely be a better indicator of a recovery than other leading indicators like the stock market, which should remain volatile.
Housing too will probably not get much better in the near term either, the CUEG economists said, as foreclosures and existing inventory leave the market flooded with supply and demand is squeezed out by tighter lending practices.
"This is a process that is going to have to work itself out," Colby said. "All of a sudden we started to get rational in our underwriting process. That has basically cut out a lot of demand. This was demand caused by people who could never really afford homes. Those people have been eliminated from the demand side of the market. It's going to take awhile until we get a reasonable equilibrium price for housing. Those assets are going to go down in value."
Still, the recovery process may be getting underway if the uptick in sales in those now-cratered markets is a broader indication of bottom feeders and bargain hunters moving in to scoop up properties at low prices across the board. "Most of the activity has been at the bottom end of the market; areas that have a high quantity of foreclosures where prices have been much more in line," noted Griffths.
Higher unemployment and declining home values have sapped the average American's, and credit union member's, household wealth. Though most credit unions remain well-capitalized and avoided subprime loans, for instance, tougher times could be ahead for many CUs as their members take a hit from the overall slowdown.
"We're not completely insulated from the more broader economic implications," said Sam Inman, CFO of Jacksonville-based Community First CU of Florida.
The future of the troubled mortgage-backed securities that caused the financial panic in the first place is very much in doubt because while the government pledged to buy up hundreds of billions of dollars of those assets, there is no consensus on how much bad debt is sitting out there. Nevertheless, Wait believes that the Fed's intervention should do some good for banks and corporate CUs that find themselves leveraged in that debt.
"Any stabilization of the mortgage-backed securities market will help any institutions that have such investments," he said. "The money that the government is spending will help improve the value of these securities and reduce the risk of holding them as well. This positive impact will also help corporate credit union investments."
Uncertainty rules the day and that will likely remain the case in the near term as a presidential election looms and new appointees fill slots overseeing critical posts overseeing the funds included in the so-called "bail-out" legislation.
"That is the question I have been waiting the mainstream media to ask each candidate," said Colby. "That is the most critical question going forward and no one has pressed either candidate for the answer. That's a little weird."
Politics aside, investors and vulture funds with hoards of cash appear ready and willing to re-enter Wall Street; credit unions too should make their moves now while national and regional banks are on their heels, CUEG economists agree.
"Now is really the time to shine. Credit unions have the funds to lend, have the capital to ride the cycle. Find people to help that are within your field of membership," said Colby, arguing that the credit market has overcorrected and many banks are refusing to lend to creditworthy individuals and businesses simply out of fear. I think we have gone in the opposite extreme and credit unions; sweet spot is between too tight of credit and equilibrium. We need to provide the credit union difference."
Added Inman, who believes consumers have never been more receptive to the credit union message, "Make sure that credit unions keep the message out about the overall safety and soundness of our organizations. I really see it as a time of opportunity to rise as an alternative."
