Amid the financial debris and extraordinary efforts to jump-start today's economy, there is only one system that is continuing to function normally: credit unions. In fact, credit unions will have a record lending year--total loan originations will probably top the $250 billion that Treasury is pumping into the banking system for unfreezing that industry’s lending ability.
Moreover, credit unions are making their funds available right where they are needed—at the window where consumers are seeking credit. Across the country, even in troubled areas such as Florida, California and Nevada, credit unions are reporting double-digit loan increases.
In the meantime, Washington policy makers are wrestling with two challenges:
- How to help stressed mortgage borrowers;
- How to insure the funds provided to help bailout the banking, insurance and financial systems serve the public good, not private self-interest.
Serving the Public Good
Although the bailout funds were supposed to help homeowners in distress, banks receiving the money quickly made clear this was not their only, or even top, priority.
In a New York Times column, "So When Will the Banks Give Loans?", Joe Nocera quoted the CEO of JP Morgan Chase in a conference call to his senior management about the use of their $25 billion capital infusion:
“We do think it will help us . . . perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. . .I think there are going to be some great opportunities for us to grow in this environment and I think we . . . use the $25 billion in that way and obviously depending on whether the recession turns into a depression or what happens in the future, you know we have that as a backstop.”
When the columnist queried Senate Banking Committee Chairman Chris Dodd about banks lending to help consumers, the Senator replied: “If it turns out that they (the banks) are hoarding, you’ll have a revolution on your hands. People will be so livid and furious that their tax money is going to line pockets instead of doing the right thing.”
In the week following this story, banks were reported using the funds for acquiring other banks (PNC acquiring National City), paying dividends to shareholders, and deferring compensation payments for senior executives.
Doing the Right Things
There are three reasons why credit unions are doing the right things in this crisis:
- They are in good financial condition. Credit unions have liquid funds, and they have made loans in the interest of their members. Credit unions have grown capital in each of the first three quarters.
- The cooperative structure with its single purpose of serving members means all resources are devoted to that end. There are no private interests to satisfy.
- There is a unitary structure from the regulator to the corporates, the CUSOs and the natural person credit unions. In the other financial systems, regulatory insurance and lending roles are separate. These other institutions have no parallel to the credit union CUSO system for sharing resources.
Profit-Making or Prophetic Role?
Privately owned firms have one overriding objective: to make a profit. Frequently this can benefit society, not just management and shareholders. But if there is a conflict between what is good for the company and a social role, self interest, as described above in the JP Morgan Chase example, will come first.
In describing this conundrum, Treasury Secretary Paulson called the self-interest a significant structural flaw that led to the nationalization of Fannie Mae and Freddie Mac.
Trying to address this concern about uniting market capital with public good, Britain in 2005 created a new legal entity, the Community Interest Company or CIC. It allows social enterprises to own or use public assets – schools, nursing homes, swimming pools, etc., but to guarantee that such properties will always remain in use for public benefit. CICs can declare a dividend to pay outside investors. As described by one author, social enterprises put their purpose before their profit while recognizing that profit is essential to their survival and growth.
Recently Fed Chairman Ben Bernanke offered a cooperative model as a potential solution for tying mortgage originators and GSE-like functions together.
All of these attempts to reconcile the public good with ownership show the power of the cooperative credit union system.
The Prophetic Role
Credit unions are more than an organizational reconciliation of potential conflicting interests. At their very best they embody both values and visions that enhance society. They create what might be called Social Capital. Examples include the myriad efforts to teach financial literacy, the extension of credit on fair terms to the least well off, and the trust created between the institution, the membership, and the community.
But that social benefit can be even more profound today. Credit unions have demonstrated that institutional and individual economic relationships can be mutually beneficial. It is this outcome that has enabled credit unions to continue “business as usual” when many credit markets are frozen and lenders on the sidelines.
Credit unions today are showing America how to overcome their economic dilemma, by providing help quickly and fairly to those who need it most. This leadership in overcoming the mortgage meltdown block by block, community by community, can inspire the rest of the country about how to move forward.
In a time of economic, political and social stress, credit unions have once again charged to the front – which is why they were created in the first place -- to play a prophetic role in society. The movement’s mission is being met: Our credit is making the state of the union better. That is why we are called credit unions.