Are Credit Unions safer or more risky places to put fiat cash than Banks? I look around and see investment banks like Lehman Bros. crashing down, and savings and loan institutions like Washington Mutual, but I don't know about credit unions.
One part of me says that credit unions are safer because they are member-owned cooperative organizations, not for-profit banks. Another part says the CUs are fundamentally fractional-reserve, and can't be made to work in a 100% reserve fashion, at least with demand-deposits.
Which leads to my question about the legitimacy of CUs. How much do they inflate, if at all? Are they fundamentally fractional-reserve, or can 100% reserves work in a CU?
Tu Ne Cede Malis!!!
-Josh
As long as there are banks out there who are engaging in fractional reserve banking and being guaranteed by the taxpayer, then CUs cannot go to a 100% reserve. The FRBs will beat them out every time on cheap loans and higher dividends.
They do inflate the currency as well and engage in fractional reserve banking.
Legal tender laws make it difficult for a Credit Union to bank in real money(precious metals).
Ok, so a CU cannot be 100% reserve because of competition from FRBs, that makes sense.
But I'm thinking of how a CU works, period. Deposits in savings and checking accounts are treated as buying shares in the cooperative. The funds are then used for interest-bearing investments, mostly home and small business loans. This is all well and good, with people helping each other out by offering cheap credit.
The trouble arises when the savings and checking accounts can be withdrawn at any time, as demand deposits. Can a CU that offers demand deposits be 100% reserves, or will that aspect of the CU have to be abandoned to be 100% reserve?
Actually that particular question applies to banks too. Can a bank offer demand deposits plus loans and still retain 100% reserves? Or will it have to be only investments that have to mature before being withdrawn, like CDs?
PS: Oh, and it didn't quiet answer my question if CUs are in any imminent danger like banks are now.
Joshua Gardner: Ok, so a CU cannot be 100% reserve because of competition from FRBs, that makes sense. But I'm thinking of how a CU works, period. Deposits in savings and checking accounts are treated as buying shares in the cooperative. The funds are then used for interest-bearing investments, mostly home and small business loans. This is all well and good, with people helping each other out by offering cheap credit. The trouble arises when the savings and checking accounts can be withdrawn at any time, as demand deposits. Can a CU that offers demand deposits be 100% reserves, or will that aspect of the CU have to be abandoned to be 100% reserve? Actually that particular question applies to banks too. Can a bank offer demand deposits plus loans and still retain 100% reserves? Or will it have to be only investments that have to mature before being withdrawn, like CDs? -Josh PS: Oh, and it didn't quiet answer my question if CUs are in any imminent danger like banks are now.
If an institution deals with demand deposits at 100% reserve, then those cannot be loaned out. Instead a checking fee, or money housing fee would be assessed on the depositor. This makes more incentive for more people to invest in their savings and CD accounts.
On your question about if they are in danger, they certainly are. The free market right now is demanding less financial institutions altogether. There are too many then what can be supported. For that period of easy credit and consumption spree that followed, there was a high demand for financial institutions. However, this was not sustainable. When the market caught up to the monetary manipulation and responded with the inflation spike, this resulted in a period where we would need significantly less financial institutions during readjustment and while the free market replenishes supply and stabilizes prices to meet the new money supply.
Let me try to explain that again but this time in much simpler terms.
Helicopter Bernanke flooded the market with easy credit along with Congress that was appropriated to housing development for lower income individuals. I mean it's an 'inalienable right to own a house', isn't it? So these credit unworthy people now have free access to excessive spending of that credit on our limited resources. (Ben Bernanke printing money didn't make more steel come out of the ground, or wood get cut down and refined, or oil out of the ground, etc.) So while the prices were still reflecting a lower total money supply, the masses of credit criminals were consuming our resources. This made the economy look great according to their measurements of consumption. But then the suppliers of all sorts of things were running dangerously low on their supply. If demand is high but supply is dangerously low, what happens to prices? They shoot way up! And that's what happened. First building materials shot way up. Then everything else followed. Oil included. So now those suppliers are replenishing their reserves and prices are coming back down to reflect the new higher total money supply.
But during that time of money expansion, there was very high demand for financial institutions to distribute the credit welfare. This caused a huge boom and a growth in the financial sector(more bankers!). But now there are so many of them and the credit market has adjusted to the increased flow of credit with high inflation. So people stop borrowing and spending and are paying down their debts! Well, that equals lower demand for banking during this time. It will be tough, but the sooner some of them go out of business, the sooner the total size of the financial sector can reflect the total demand for financial services and those who do survive will still be able to grow once again.
This hits all of the financial sector, who owns them is irrelevant. However, it make cause more people to do more business with credit unions instead and so they may break even for a period of time or even see steady growth. But they will still be hit by the disparity in the high supply of financial service providers and low demand for financial services.