War Could Unleash Economy's Strength

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The war in Iraq will continue to increase the level of uncertainty felt across the nation, but some economic experts suggest there is an "underlying strength" in the economy that has been belied by concerns about a second Gulf war.

"The economy has looked worse than it really is because of concern about this war for the last few months," said CUNA Economist Bill Hampel. "There is some substantial underlying strength to the economy, and it has been poised for recovery-but for concerns of the war not going well."

NAFCU Economist Tun Wai agreed. "It's not as if consumers don't have the capacity to spend or borrow, they just don't want to because of all the uncertainty," he noted.

That uncertainty has been hurting the economy for some time, and the Federal Reserve's response has been to cut rates, but "it's getting more difficult because there's just not that much room left," Wai added.

One big aspect of this uncertainty: the duration of the war. "If the war is short, then the uncertainty will disappear, and we can start getting back to a normal economy," Wai suggested. "And that would be a good thing. We have been getting closer and closer to a normal economy and just couldn't quite get there."

In fact, if the war is "quick and clean" it could bolster the economy.

"The general consensus is that the war will be short, decisive and over pretty quickly, and if that happens, as is most likely, then the effects will be quite positive," Hampel explained. "If it goes as expected, it will be a few weeks, a month max, then consumer confidence will recover quite quickly, and we'll see a reverse of direction of the the last few years. Interest rates will quit falling and move up somewhat, that slows the refi boom and stimulates loan deman and retards savings growth somewhat."

But there is no guarantee that the war will be short, and therein lies the rub. "If the war is less clean, if it takes longer than expected and we sustain significant casualties, then it will have the opposite effect and it will worsen consumer confidence. In the nightmare scenario, this war drags on and spills over to other countries, and that hurts oil prices and the stock market tanks," Hampel stated. "The other possibility is that the war goes quickly, but some time in the next six months there is a terrorist backlash in the U.S., and we already know how that effects consumer confidence and the economy. But the preponderance of opinion is that the war will be over quickly and there will be no major terrorist event, and if so, then this will release the economy from the doldrums."

"If the war is long, then the uncertainty will weigh very heavily on the economy, and we're going to have to look to something (other than dropping interest rates) to move the economy forward, to counterbalance that uncertainty," Wai suggested.

Indeed, even before the nation officially went to war late last week, several of the governors on the Federal Reserve indicated the Fed will have to start targeting different rates and look at other measures to provide economic stimulus.

"They could target two-years or five-years or even go so far as to open up the flood gates in terms of liquidity," Wai noted. "During Vietnam, we had what was called an accommodating monetary policy, and we could see something like that again."

Going forward, credit unions that aren't military based but that may have some reservists or other military personnel "hidden" among their membership will have to bone up on the Soldiers and Sailors Relief Act and be prepared to deal with either continued stultification of loan demand or a reinvigorated lending market, depending on how everything goes. "In a low-rate environment, it's supposed to help borrowers and hurt savers," Wai related. "If you have an elderly member across the table, it's very hard to make adjustments to how you do business. In terms of having liquidity, credit unions have more then enough. Be sure to be able to match in flows to out flows. Credit unions are wise to be keeping investments very short and not chasing yields."

Hampel agreed, adding, "They shouldn't be running the credit union based on a firm belief that the economy will go up or down, just be prepared for an increase in loan demand."

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