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: