Posts filed under ‘Economy’
There has been an awful lot of talk about the increase of economic inequality. Specifically does it reflect a normal cyclical adjustment following a recession in which banks lent too much and people spent too much or does it reflect a longer term more fundamental shift in the economy?
First let’s acknowledge that the economic statistics aren’t reflecting the everyday reality of many of our members. The economy is growing but not everyone is benefiting. In a great piece of analysis in yesterday’s WSJ, the paper studied Labor Department statistics and an extensive survey of consumer spending habits to gauge how households earning between $18,000 and $95,000 a year are spending their money. Its conclusions are worth quoting at length:
“The data show they are losing ground. Overall spending for the group rose by about 2.3% over the six-year period from 2007, even as inflation totaled about 12%. At the same time, income for the group stagnated, rising less than half a percent. With health care and other costs rising, these consumers spent less on furniture, entertainment, clothing and even child care, the Journal analysis found.”
Now I know some of you are thinking that these statistics reflect the normal ebb and flow of the business cycle. After all, Americans now know what happens when banks lend and people spend irresponsibly. However the statistics say that more is going on here than the economic cycle. As pointed out by Erik Brynjolfsson Andrew McAfee in their book “The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies” median household income hit its high in 1999 and has dramatically fallen since then. In addition you have to go back since before the Great Depression to find another period when the top 10% of wage earners earned more than 50% of total income. By the way the top one percent are earning 22% of the income pie.
Economics 101 tells us that greater productivity leads to higher wages. If this is the case than we should be seeing upward pressure on wages but as the WSJ article makes clear this is not happening and by some measures this linkage between productivity ad wages has been weakening for decades.
Is it possible, as the authors suggest, that technology has created an economic system where there is no longer a linkage between productivity and wages? Where computers take over the tasks previously performed by humans and makes those employees that remain more efficient at a cheaper cost? I’m not convinced yet but all you have to do is look at the most modern branches and ATMS to see that we need fewer employees than we used to.
I’ve always thought that the best way to find out if the country’s economic downturn is over isn’t to pay too much attention to the economic statistics but to listen to your members. Are they talking with pride about the school their kids got accepted to or are they wondering how they are going to pay for college? Are they enjoying their work or wondering how they are ever going to retire? Do they have a career or a job they settled for months after being laid off? I think most American’s would be shocked to find out that the economy in which they are struggling to make ends meet is the envy of most of the world: inflation is nonexistent, productivity is growing and unemployment is tumbling but it sure doesn’t feel that great to the average consumer.
What is going on here? Something that the statistics aren’t capturing.
That is my most important takeaway from the FDIC’s biannual survey of unbanked and under-banked households that was released yesterday. If you are interested in getting these potential members into your branches-as credit unions you have an ethical and legal obligation to try to do so-you better find a way of competing with the prepaid card.
“The survey results suggest that sizeable proportions of unbanked households and, to a lesser degree, under-banked households, relied on prepaid cards for many of the same purposes that households associate with checking accounts” Its authors conclude.
According to the report 7% of US households are unbanked but a staggering 20 percent of households are under-banked meaning they have an account but have obtained services from nonbank alternative financial service providers in the last 12 months. The unbanked rate is down from 8.2%.
The survey reveals that nearly 8% of all households use prepaid cards and 22.3% of unbanked households have used prepaid cards in the last year. Clearly this is a growing market and it’s going to get bigger but the report underscores just how difficult it is to break into this market. On the one hand almost half of unbanked prepaid card users plan to open up an account in the next year but here is the catch: Only 10% of all households obtained their prepaid cards from branches and among the unbanked, where distrust of banks is higher, only 4% do. It will be interesting to see how many of the unbanked really do open up accounts. I have my doubts because as prepaid cards offer more of the conveniences and consumer protections of traditional accounts many people won’t see the need to make that first visit to the bank or credit union.
I have always been squeamish about prepaid cards because people at the bottom rung of the financial climb need to open up accounts to climb to financial security. But prepaid cards are here to stay and if these survey results are accurate offering them may be a great way of exposing the unbanked to your credit union. Based on this survey if I was putting together a prepaid marketing plan here are the key points that I would want to get across to consumers looking for a Prepaid Card: Credit Unions are (1)Trusted partners that can (2) Offer you the convenience of prepaid cards and are (3) backed up with the safety and security that comes from belonging to a financial institution protected by your friends and neighbors.
The report is a great resource. Here is a link.
RIP Quantitative Easing
With the Fed’s announcement yesterday that it was no longer going to make additional purchases of long term treasury bonds and mortgage backed securities it means that the most aggressive long-term intervention by the Fed into the broader economy will be coming to an end almost. Remember that the Fed will still be rolling over its existing bond purchases so it will be continuing to exercise downward pressure on long-term interest rates. Yesterday’s FOMC statement also indicates that the fed is not concerned that the recent downturn in the global economy, which played such a big part in Wall Street’s recent gyrations, fundamentally alters the outlook for US economic growth. If the conventional wisdom is correct expect short-term rates to rise the middle of next year.
They Might Be Giants
With their third world series win in five years the Giants must now be considered the most dominant team in baseball. They can’t be considered one of baseball’s great flukes anymore. They win when it matters the most.
I like it when good teams consistently win championships because championships should be difficult to win. The Royals lost this year but their lose will make their eventual World Series victory that much sweeter. My only question is: Why is it that when the Yankees win four World Series in the 90’s with strong starters, dominant relievers and a solid lineup of great defensive players its considered bad for baseballs, but everyone celebrates the resurgence of the game when the Giants win with the same formula?
This week, Apple Pay went live. You all should know about it by now, but Apple Pay permits consumers to pay for goods at participating retailers with the wave of an iPhone. As readers of this blog will know, I am a big fan of Apple and its technology, but I am also concerned that if Apple Pay is successful it could exacerbate a financial system of haves and have nots. Most notably, only a handful of the nations largest banks and its largest credit union were selected to unveil the technology.
So I was pleased this morning when I saw news that Visa is working with hundreds of financial institutions to enable them to accept the technology in the coming weeks. I was especially pleased when I spotted a fair number of credit unions on the list. I applaud them for this foresight and I certainly hope to see more and more credit unions joining in the coming months. I understand that this is not a win-win situation. Apple is taking a cut of transactions that members would probably have used debit cards for anyway. But times change and pretty soon no one will be using plastic. The technology makes it obsolete.
Could You Survive An Economic Doomsday?
The Fed released the scenarios it will use to stress test the ability of the nation’s largest banks to withstand economic Armageddon. Specifically, bank holding companies with $50 billion or more in assets are required to test how they would withstand a multi-year contraction and state member banks with consolidated assets of $10 billion or more must also conduct stress test.
In this year’s “severely adverse scenario” (I love bureaucratese) U.S. corporations experience “increases in financial distresses that are even larger than would be expected in a severe recession, together with a widening in corporate bond spreads and the decline in equity prices.” But wait, there’s more. The price of oil goes up to $110 per barrel and the unemployment rate increases by 4%. Fortunately, these are not predictions, simply worst case scenarios intended to assess the resilience of our financial system.
On that cheery note, have a great weekend.
Yesterday, the FDIC became the first agency to finalize qualified residential mortgage regulations mandated by Section 941 of the Dodd-Frank Act. To understand how big a deal this is, think of those ridiculous Hollywood disaster movies where Earth narrowly avoids a speeding meteor the size of the Empire State Building that will end life as we know it. Yesterday’s announcement will have no direct impact on credit unions. In fact, the NCUA is the only financial regulator not required to join in issuing QRM regulations because credit unions don’t issue asset-backed securities. Nevertheless, yesterday’s actions have important consequences for any institution providing mortgages.
Here is some background. The CFPB was responsible for regulations defining qualified mortgages (QM). These are the regulations that have already taken affect. This blog discusses Qualified Residential Mortgages (QRM).
One of the major causes of the mortgage meltdown was an explosion of mortgage-backed securities. Banks and mortgage companies lowered lending standards in part because of the insatiable appetite of Wall Street for mortgages. Investment banks would package mortgages into securities, which were sold with painful consequences for many investors including the failed Corporates. Critics of the system argued that securitizers, generally the investment banks that created these bonds, needed to have a financial stake in the bonds that they were selling.
Section 941 of the Dodd-Frank Act responded to this concern by establishing minimum risk retention requirements for issuers of mortgage-backed securities. Specifically, securitizers are required to retain at least 5% of any asset-back security they issue. But an important exception was made. Joint regulations were to be issued by the federal banking agencies, HUD and the FHFA defining what constitutes a qualified residential mortgage within 270 days of Dodd-Frank’s enactment (so much for deadlines). The definition is crucial because the 5% risk retention requirement does not apply to mortgage-backed securities comprised of QRMs. Congress also mandated that the QRM definition could be no broader than the CFPB’s definition of a qualified mortgage (QM).
Here comes the speeding meteorite part of today’s blog. The regulators responded to their mandate by proposing that QRM mortgages be required to have a maximum loan-to-value ratio of 80%. Imagine a world in which only mortgage applicants with at least 20% to put down on a home could qualify for a mortgage. Level-headed people responded to this suggestion by proclaiming “the death of the American Dream.”
Yesterday’s actions officially put an end to this game of chicken with the trade-off that the CFPB is even more powerful than ever before. Why? At the end of the day, the regulators decided that a QRM is any mortgage that meets the Bureau’s definition of a qualified mortgage. This means that if you want the ability to sell your mortgages to a secondary market participant, your mortgages must meet either the CFPB’s qualified mortgage standards or be eligible for sale to the GSEs. Remember that you don’t have to underwrite to QM standards so long as you can document why a member has the ability to repay her mortgage loan and you are willing to retain the mortgage.
One editorial comment. The regulators did the right thing yesterday, but yesterday’s announcement is another example of how Dodd-Frank does precious little to address the underlying causes of the Great Recession. If you want to avoid reckless underwriting in the future, then by definition that means imposing more stringent underwriting standards.
My good friend Otto von Bismarck once said that “the nations of the world are on a stream, which they can neither create nor direct, but upon which they can steer with more or less greater skill and success.” This quote came to mind this morning, not just because this is International Credit Union Week, but because the economic environment in which your credit union operates is increasingly impacted not just by the U.S. economy but by international events as well. If you want to know why the stock market is more inconsistent than the Giants, all you have to do is look at what’s going on in the world.
- The slow-down in the German economy is directly impacting the rates you get for your mortgages. The German economy has been the one bright spot of the Euro Zone for the last several years. It has used the pulpit given to it as a result of its economic performance to demand that other Euro Zone countries, most notably Greece, put fiscal discipline ahead of short term economic growth. It has also made German bonds an attractive option for investors looking for safe but solid returns. But recently, Germany’s run of economic good fortune seems to be coming to an end. Its exports, which have been the key to its economic growth over the last decade, are declining. What does all this mean for your credit union? Don’t expect longer term bonds to rise any time soon. A weakening German economy makes U.S. Treasuries that much more attractive. Yesterday the yield on the benchmark 10-year treasury note fell to 2.206, the lowest closing level since 2013 and the 30-year bond’s yield dropped to 2.957, which, according to Dow Jones Business News, is its lowest closing level in 17 months.
- China is still experiencing a rate of economic growth that would be the envy of any politician seeking re-election here next month, but its decline in GDP growth is already impacting countries like Germany and if its slow-down continues, China’s economic woes will take momentum from our tepid economic recovery.
- Another country to keep an eye on is Brazil. Along with India, China and Russia, it comprises the so-called Bric nations that exemplify the growth of emerging markets. However, Brazil’s economy is now in recession. Considering that, according to the Federal Reserve, 47% of total U.S. exports go to emerging markets, the slow down in these countries will impact America’s economic growth, the only question is by how much.
- Finally, the world is a lot more interconnected than it was in 1976 when a young Belgian researcher discovered of a new virus. This morning the CDC confirmed that a second health care worker contracted the Ebola virus. If the virus continues to spread, don’t underestimate the potential economic impact. For example, it is estimated that the SAR virus cost the world economy $50 billion in 2003.
Of course, it isn’t just bloggers that are paying attention to these trends. In a speech before the IMF last weekend, Stanely Fisher, the Vice Chairman of the Federal Reserve, remarked that “if foreign growth is weaker than anticipated, the consequences for the U.S. economy should lead the Fed to remove accommodation more slowly than anticipated.” In other words, the international climate is already impacting just how low short term interest rates are going to remain and for how long.
For financial industry junkies today is like a total eclipse of the sun. Third quarter earnings reports kickoff for the major banks and J.P. Morgan, Wells Fargo and CitiGroup are all announcing their earnings on the same day. (Incidentally, because of a computer glitch J.P. Morgan’s results slipped out earlier than their 7:00 AM release time and it reported positive results. What a coincidence.)
One thing for you to keep an eye on is the extent to which credit cards boost the bottom lines of these behemoths. If the conventional wisdom is correct credit cards present both a growth opportunity and a challenge for your credit union. As the WSJ explains in an article yesterday:
“The U.S. credit-card industry has found its sweet spot: a combination of moderate economic growth, low-interest rates and consumers who have struck a balance between spending more and paying their bills on time”
Even for those of us who look at the U.S. economy and see a glass half empty the facts tell you that people are once again taking out the plastic and that there may be some low hanging fruit for credit unions with the right cross-sales pitch.
The bank making the most aggressive push is Wells Fargo. As explained in this recent article in the San Francisco Business Journal , its CEO John Stumpf has groused that the bank has the largest network of branches in the country but ranks seventh among card issuers “ Of our 25 million customer households, how many do you think have a credit card?” They all do, but only 35 percent have their credit card with us.” He is out to change this.
Then there is the fact that, even though the CARD Act outlawed some of the most unseemly consumer credit practices, the low-interest rate environment more than makes up for the lost fee income. In addition, some executives sheepishly admitted to the WSJ that the legislation might actually end up being good for business since it makes it easier for people to manage their existing debt.
How does all this help credit unions? Even though the explosion of vehicle loans is getting the lion’s share of the attention credit unions have also seen solid growth in the credit card business. CUNA Mutual reported in its July Credit Union Trends Report that “ Credit union credit card loan balances are expected to grow 7% in 2014 even though some consumers are still leery of debt after the Great Recession and others are hesitant to take on higher-interest rate debt. Better pricing, easier access to credit and lower fees have boosted credit unions’ market share of the consumer installment credit market.”
Of course continued growth is predicated on the assumption that the American Consumer has climbed out of the bunker and now is confident that the worst is over. Consumer confidence is still shaky and no doubt even shakier after the market gyrations of the last few days. Still, given how low-interest rates are and the fact that the unemployment rate is falling how well you cross sell your members on credit cards will be one of the keys to your growth in the year ahead. After all if you don’t close the deal one of the behemoths probably will.