Fixing Liability Side of Balance Sheet Is Easy — Making Loans Is the Hard Part
Some might argue that Karl Marx was vindicated last year. It seems that capitalists can't miss an opportunity to spoil a good thing, given enough time. Prosperity leads profit seekers to over-invest, Marx would say, and when capacity eventually outstrips demand the whole things collapses. The next generation of winners picks up the pieces at liquidation prices, and the whole cycle starts once more.
Actually, the specific triggers for a financial crisis are always different. This time around it was securitized-liar loans and credit default swaps that separated underwriting from risk. It was Wall Street compensation practices that rewarded unreasonable risk-taking and short-term myopia. It was market value accounting that works great in theory but falls apart when markets seize up. It was easy money from the Fed, over-leveraged investment banks, unscrupulous mortgage brokers and appraisers, rating agencies competing to hand out triple As, politicians promoting affordable homeownership, regulators asleep at the switch, etc., etc. Take your pick. Choose them all.
But the fundamental dilemma we face in figuring out where to go from here is summed up in the following headlines:
- 70% of U.S. GDP comes from consumer spending, up from 60% in the early '70s.
- During the last decade or so, that consumption fueled GDP growth that exceeded the rate by which household incomes grew.
- That "miracle" occurred because consumers thought they were wealthy because of gains in their home values and 401(k)s.
- So they dispensed with saving and borrowed against those gains to finance bigger homes, cars, flat screen TVs and vacations, believing they were building up their nest eggs when, we now know, they actually weren't.
- In fact, over the last few years, the consumer savings rate (household inward cash flows minus outbound spending) was barely positive. And, it turns out, the home equity and stock market gains are no longer there.
- So now it comes to pass that consumers (no fools) are actually saving and not spending. The savings rate is already up and economists predict it will reach 3% to 5% this year, perhaps even more.
- Do the math: Consumers aren't spending like they were, economic growth is negative and it's going to stay that way for quite awhile.
- Maybe a trillion or so from the Feds will help, maybe it won't. But if it works, it won't be for months or maybe years, for sure.
That's reality, folks. And the question is what credit unions are going to do in this new environment to make money for our members, who are nervous, mad and suffering.The liability side of our balance sheet will be the easier part. With the new $250,000 deposit insurance guarantee and consumers fleeing to safety, a credit union account looks like a great place to put your money, almost regardless of rate. Commercial banking looks like a confederacy of dunces, and that is to our advantage. Consumers now want to save and not spend, we have not betrayed their trust like the for-profits have, and thus it is our great opportunity to design (or resurrect) savings products that are safe and secure, that help ordinary people rebuild their financial security.
For starters, an NCUA guaranteed IRA paying 3.5%-4% is a far better deal than consumers would have netted in the stock market over the past decade. The retail layaway, invented during the Depression, is making a comeback. Maybe the old Christmas Club (with a decent rate) should, too. Health savings accounts (HSAs) are being offered by many credit unions and should become standard at more.
The bigger challenge comes in getting out loans. We have some opportunities there on the margin if we're willing to rethink how we underwrite loans, and I'll talk about them next time. But auto loans will be down, no matter what we do in the next few months. And consumers will be paying off credit cards and home equity loans whenever they can.
The new opportunities are likely to be in lending for education and health care, two of the very few sectors where job growth is still being predicted. Consumers may be cutting back on their discretionary spending, but they still want to put their children through college. Credit unions not offering guaranteed student loans should take another look. With more and more people lacking health insurance, a loan from the credit union may be the best answer to a medical crisis for many. (Maybe there's a way of tying that in with a credit union HSA.) And lastly, we should be doing more lending to small business. Our founders, the first credit cooperatives in 19th century Germany, were not set up to finance vacations to Orlando. They provided loans to individual craftsmen and small shop-owners. There were good reasons for the first U.S. credit union laws to require that lending be for a "provident and productive purpose." But this is a much bigger topic, for a future column or two.
Today, more than ever, we need to talk with our members, listen to their concerns, identify their needs and creatively reposition our efforts accordingly. The good news is that, unlike the competition, we have money to lend and we're eager to get it out there to creditworthy people who need it.