[A-List] How Credit Unions Survived The Crash
seanfischer at earthlink.net
Tue Mar 3 10:47:56 MST 2009
Anne, can you please explain for me and any others, what "fractional reserve banking" is?
>From: Anne Williamson <annewilliamson at msn.com>
>Sent: Mar 2, 2009 5:17 PM
>To: a-list at lists.econ.utah.edu
>Subject: Re: [A-List] How Credit Unions Survived The Crash
>What Ralph fails to mention is the single, greatest reason credit unions are not imploding, ie credit unions do NOT engage in fractional reserve banking as do banks, which was one of the "triumphs" of the Progressive Age. Enjoy the achievement!
>> Date: Sun, 1 Mar 2009 20:02:23 +0900
>> From: shimogamo at ashisuto.co.jp
>> To: a-list at lists.econ.utah.edu
>> Subject: [A-List] How Credit Unions Survived The Crash
>> by Ralph Nader
>> Countercurrents.org (February 27 2009)
>> While the reckless giant banks are shattering like an over-heated
>> glacier day by day, the nation's credit unions are a relative island of
>> calm largely apart from the vortex of casino capitalism.
>> Eighty five million Americans belong to credit unions which are
>> not-for-profit cooperatives owned by their members who are depositors
>> and borrowers. Your neighborhood or workplace credit union did not
>> invest in these notorious speculative derivatives nor did they offer
>> people "teaser rates" to sign on for a home mortgage they could not afford.
>> Ninety one percent of the 8,000 credit unions are reporting greater
>> overall growth in mortgage lending than any other kinds of consumer
>> loans they are extending. They are federally insured by the National
>> Credit Union Administration (NCUA) for up to $250,000 per account, such
>> as the FDIC does for depositors in commercial banks.
>> They are well-capitalized because of regulation and because they do not
>> have an incentive to go for high-risk, highly leveraged speculation to
>> increase stock values and the value of the bosses' stock options as do
>> the commercial banks.
>> Credit Unions have no shareholders nor stock nor stock options; they are
>> responsible to their owner-members who are their customers.
>> There are even some special low-income credit unions, though not nearly
>> enough to stimulate economic activities in these communities and to
>> provide "banking" services in areas where poor people can't afford or
>> are not provided services by commercial banks.
>> According to Mike Schenk, an economist with the Credit Union National
>> Association, there is another reason why credit unions avoided the
>> mortgage debacle that is consuming the big banks.
>> Credit Unions, Schenk says, are "portfolio lenders. That means they hold
>> in their portfolios most of the loans they originate instead of selling
>> them to investors, so they care about the financial performance of those
>> Mr Schenk allowed that with the deepening recession, credit unions are
>> not making as much surplus and "their asset quality has deteriorated a
>> bit. But that's the beauty of the credit union model. Credit unions can
>> live with those conditions without suffering dire consequences", he
>> His use of the word "model" is instructive. In recent decades, credit
>> unions sometimes leaned toward commercial bank practices instead of
>> strict cooperative principles. They developed a penchant for mergers
>> into larger and larger credit unions. Some even toyed with converting
>> out of the cooperative model into the shareholder model the way
>> insurance and bank mutuals have done.
>> The cooperative model, whether in finance, food, housing or any other
>> sector of the economy, does best when the owner-cooperators are active
>> in the general operations and directions of their co-op. Passive owners
>> allow managers to stray or contemplate straying from cooperative practices.
>> The one area that is now spelling some trouble for retail cooperatives
>> comes from the so-called "corporate credit unions", a terrible
>> nomenclature, which were established to provide liquidity for the retail
>> credit unions. These large wholesale credit unions are not exactly
>> infused with the cooperative philosophy. Some of them gravitate toward
>> the corporate banking model. They invested in those risky mortgage
>> securities with the money from the retail credit unions. These "toxic
>> assets" have fallen $14 billion among the 28 corporate credit unions
>> So the National Credit Union Administration is expanding its lending
>> programs to these corporate credit unions to a maximum capacity of $41.5
>> billion. NCUA also wants to have retail credit unions qualified for the
>> TARP rescue program just to provide a level playing field with the
>> commercial banks.
>> Becoming more like investment banks the wholesale credit unions wanted
>> to attract, with ever higher riskier yields, more of the retail credit
>> union deposits. This set the stage for the one major blemish of
>> imprudence on the credit union subeconomy.
>> There are very contemporary lessons to be learned from the successes of
>> the credit union model such as being responsive to consumer loan needs
>> and down to earth with their portfolios. Yet in all the massive media
>> coverage of the Wall Street barons and their lethal financial escapades,
>> crimes and frauds, little is being written about how the regulation,
>> philosophy and behavior of the credit unions largely escaped this
>> There is, moreover, a lesson for retail credit unions. Beware and avoid
>> the seepage or supremacy of the corporate financial model which, in its
>> present degraded overly complex and abstract form, has become what one
>> prosecutor called "lying, cheating and stealing" in fancy clothing.
>> Ralph Nader is a consumer advocate and three-time presidential candidate.
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