Capital Levels Not as 'Lofty' as They Might Seem
What goes around comes around. What has happened can happen again. History repeats itself. Those who do not learn from history are bound to repeat the mistakes of others. Pick your platitudes, but let's really try to learn a little bit from history. I respect CUNA's Bill Hampel as an economist who has served the credit union industry well, but I take serious issue with him, and others, on the subject of capital levels and what is an appropriate amount to have as detailed in the front page story entitled "Lofty Capital Levels in '06 Indicate CUs May Not be Taking Enough Risk on Lending Front" of the Feb. 14 issue.
As a senior citizen of Georgia, I can unfortunately remember the not-so-halcyon days when President Carter was in office, when prime rates soared some 13 basis points in 13 months, the worse inflation rate in U.S. history to date, and borrowers were paying upwards of 21% interest rates (as I did), and so very many financial institutions--banks, credit unions and S&L's--were in dire straights, with the latter going under rapidly. If all financial institutions had mark-to-market portfolios then, as we do nowadays, far more would have gone under. Financial institutions were really supported through the period by accounting fictions, as much as anything, as nearly none had the prior experience of dealing with South American inflation rates. The capital retained by credit unions can be viewed as the cumulative insurance premium assessed the members, over the history of the credit union from its inception, designed to insure the viability of the institution so as to enable it to survive a catastrophic financial event. Today's members reap the benefits of this accumulation of premiums (capital) and, in turn, are contributing to the future. Hampel points out that the U.S. Household Savings Rate is significantly low. Perhaps so, perhaps not. Permit me to quote from a recently received e-mail from one whom I also respect as very knowledgeable on the subject:
"An oft-cited statistic, the net savings ratio, plays on the fears that the U.S. consumer's conspicuous consumption is out of control and cannot possibly continue. Don't believe it."
The U.S. net savings rate has been steadily declining the past few decades and is negative for the first time in history--meaning consumers are spending more than they receive in income.
"This may sound reckless but in reality it's completely rational. Rarely is carrying zero debt and socking away every penny of extra earnings the correct decision. Much like a corporation, individuals can leverage their balance sheets to take advantage of low interest rates and higher returns elsewhere. And that's exactly what they've been doing, to great success. Household net worth has increased an average of 10% a year in the past three years, a time when virtually every member of the media decried the precarious position of consumers."
He goes on to highlight the following flaws in the calculation of the savings rate:
o It ignores capital gains on homes and financial instruments (such as 401(k), IRAs and other savings plans) but subtracts capital gains taxes.
o It ignores pension payments to retirees.
o It treats spending on home improvement the same as spending on perishable goods such as food, even though home improvement adds to the value of a home.
o It uses income numbers from the flawed payroll survey, which consistently understates job creation.
It's safe to say consumers are in better financial shape than they have ever been. Evans M. Harrell Director Lockheed Georgia Employees FCU Marietta, Ga.