MADISON, Wis.-Predictions and models of a soft landing or mild recession were blown apart in 2008, as the confluence of a typical economic slowdown and what Federal Reserve Chairman Ben Bernanke described as a "once in a century" credit crisis pummeled the economy.
Though others were loathe to speak the word "recession" in the first two quarters of the year, CUNA Mutual Chief Economist Dave Colby said he thought the economy was contracting as early as January of 2008.
"I wasn't going to wait for the official dating of it," he said, referring to the National Bureau of Economic Research's November call that the economy had been going in reverse since December 2007. "After going around the country talking with credit unions-clearly we were in a recession."
While Colby sees this latest recession as a typical wringing out of excesses, it is especially painful now because of the related but also somewhat separate credit crunch. Though many Wall Street experts concluded that the worst was over in late 2007, the collapse of Lehman Brothers and the fire sales of Bear Stearns, Wachovia, Merrill Lynch, and Washington Mutual proved otherwise.
"[In 2008], the credit crisis continued to unfold and amaze. Most mainstream economists had no clue about the extent that this questionable paper was leveraged," Colby explained. "Unless you were an insider, you didn't really understand how much of this paper was leveraged and counted as an asset in multiple locations."
The far reach of the American housing market was also demonstrated in 2008 as plunging home prices made mortgage-backed securities heavily toxic on balance sheets across the financial sector both domestically and abroad.
"What surprised a lot of economists was the extent the downturn in the housing market really influenced the ripple effect to other parts of the economy," said Tun Wai, an economist for NAFCU.
Credit unions, especially those in the hardest hit areas, turned out to be the beneficiaries of the crisis of confidence in big banks and the failure of thrifts like IndyMac. As manufacturers financial arms pull back and captive financers shut down, credit unions greatly increased their share of the auto lending market, and achieved new prominence in real estate lending as well as Americans wary of other financial institutions turned to their local cooperatives.
"I don't think your average American consumer really knew about the breadth of services of credit unions," said California/Nevada League economist Terrin Griffiths, who noted that CUs there are still weathering the storm fairly well. "By promoting themselves in this marketplace, it has made households think about it and know that they can belong."
"This has been such a non-traditional business cycle because of the credit crisis," Colby added. "Usually the borrowing would go down (in a recession), but credit unions have had an excellent year for lending because all of the competition has left."
The economic stimulus package that put a few hundred extra dollars into the hands of every American boosted GDP and consumer spending slightly at the start of the year, but not all of that money was put back into the economy, Wai said.
The first two quarters of 2008 also saw increased savings rates, and while credit unions saw a decrease in savings of 1.2% in Q3, American households also reduced their debt by 0.8%-the first time that has happened since data on the subject began being compiled in 1951. But since consumer spending makes up more than two-thirds of the nation's GDP, the combination of increasing unemployment and a curtailing of spending should continue to hurt the top line until at least Q2 2009.
NAFCU's Wai does see some light at the end of the tunnel. "I see some glimmer of hope with the stimulus package and other monetary policy. All of that liquidity has to go somewhere and some people it will turn into a loan."
Originally Reported In CU Journal: Jan. 7, 2008
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