On corporate crack and the credit union difference

September 16, 2014 at 8:58 am Leave a comment

Your average member isn’t humming “Happy Days Are Here Again” even though the economy is doing much better on paper.

One of the reasons is the increasingly widespread use of stock repurchases. Corporations buy back their own shares, often taking advantage of low interest rates to borrow the purchase money. Stock repurchases provide one more talking point the  next time you talk to your local legislator about why credit unions are important sources of localized economic development or, try to explain to your neighbor what a cooperative is before their eyes glaze over and they edge toward other more interesting conversations at the neighborhood party.    Incidentally Banks have not been immune from this trend.

The WSJ is reporting this morning that corporations used 31% of their second quarter cash flow on stock repurchases. This week’s Economist takes a look at the trend and dubs it “Corporate Crack” contending that it may be of short-sighted benefit to investors by creating another financial bubble.

http://online.wsj.com/articles/companies-stock-buybacks-help-buoy-the-market-1410823441

Why should you care? For one thing every dollar spent on a share buyback is money not spent investing in new infrastructure or new employees. Corporate America is sitting on more than $1 trillion in cash and the economy really won’t heat up untill it starts spending it.   As former Reagan White House Budget Director David Stockman commented in a blog post this past July:

“During the “difficult” economic times since the financial crisis began gathering force in Q1 2008, the S&P 500 companies have distributed $3.8 trillion in stock buybacks and dividends out of just $4 trillion in cumulative net income. That’s right, 95 cents of every dollar they earned—including the huge gains from restructurings, downsizing and job terminations—was flushed right back into the Wall Street casino.”

http://davidstockmanscontracorner.com/bubble-finance-at-work-how-the-share-repurchase-mania-is-gutting-growth-and-leaving-financial-wrecks-like-radio-shack/

The trend also underscores why the cooperative financial structure is so important. I like to tell people that credit unions are the last remaining true community banks,   I’m no wide-eyed idealist: the simple truth is that credit unions make money by lending it out or investing it. There is no share price to worry about . In contrast, that so-called community bank down the street is probably owned by an increasingly large Bank Holding Corporation thinking of new and creative ways to prop up its share price. So long as the share price and economic growth align this is fine but as Wall Street gets more and more skilled at creating its own economic reality no one can be sure this is really the case.

News of the weird

I had to do a triple take as I was going over some clips last night and read that the  National Association of Realtors is getting a proverbial “seatt at the table” as the FAA crafts rules regulating the use of drones. It appears that in a profession dominated by ultra aggressive sales people always looking for a competitive edge some realtors have turned to unmanned aircraft to get a birds-eye view of the latest property for sale. I guess the smell of freshly baked bread to coverup the smell wafting up from the basement just doesn’t cut it anymore 

http://realtormag.realtor.org/law-and-ethics/briefs/article/2014/03/drones-in-real-estate-not-so-fast

Entry filed under: Economy, General. Tags: , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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