Doctors used to call pneumonia ‘the old man’s friend’ because it afforded a quiet and relatively painless death to aged people already fated to die from a more unpleasant malady. Recessions perform the same function for businesses that have been ailing for some time; they put them out of their misery in a hurry.
That seems to be the case with City-County Federal Credit Union, which is combining locally with Wings Financial Credit Union.
While the deal is billed as a merger, City-County has been in financial trouble for some time. The deal seems little different from a healthy bank absorbing a failing one.
While City-County’s managers say it was recovering, its prospects were poor in face of the economy’s continuing weakness. As City-County was one of the 10 largest credit unions in the state, only a handful of others were large enough to absorb it. Wings, formerly a credit union for Northwest Airlines employees, was one of few able to handle the deal.
The “easy death” comparison may offend the owners and employees of firms that go broke in recessions. They may face painful adjustments in their lives. But the metaphor is useful because it helps explain why the amplitude of the business cycle can be so extreme.
If economies always stayed on a steady keel, with neither booms nor busts, market forces would interact with the circumstances of individual firms to determine their success or failure. There would be a steady stream of new business startups and a similar steady stream of business failures, though not necessarily as large.
The point is that both entry and exit would be determined by factors specific to the firms involved and not dependent on the overall economy.
Of course that is not the case. When an economy booms, households and businesses spend freely. Sales are good for many classes of businesses. Even if there are management problems, adverse demographics or ongoing structural change in their sector, most firms can succeed because plenty of customers are coming through the doors.
Moreover, credit is freely available when times are good. Lenders are not necessarily spooked by a few sour-looking bad months on the company’s income statements. Borrowing can offset deeper problems and delay painful restructuring.
But that can turn around in months. Any event that shocks public confidence — terrorist attack, oil price spike, failure of a major financial firm or collapse in stock prices — can suddenly turn the tide. Households and businesses suddenly turn cautious and cut spending as sharply as possible. Lenders reach for their magnifying glasses and fine-toothed combs whenever a new set of borrower’s financial statements land on their desks. Their default response becomes “no” rather than “yes.”
Thus businesses that thought they were making it suddenly find themselves on the rocks. It is too late to restructure and no one is willing or able to help. City-County’s relatively positive outcome is one to be envied by employees of myriad other firms that were completely liquidated over the past two years.
Although the competitive herd has been thinned, taxpayers and consumers can heave a sigh of relief too. Unlike many shotgun marriages of depository institutions in recent years, no portfolio of bad loans has to be absorbed by any federal deposit insurance fund. Deposit insurance premiums, which ultimately come out of customers’ pockets even if remitted by the bank or credit union, won’t go up as a result of this deal.
Moreover, this is a deal that probably will improve economic efficiency for society as a whole. Fewer resources will be required to provide the same services to consumers.
But there is no escaping the fact that yet another long-established business has gone out of existence due in part to a bad economy. That will register in the minds of City-County’s employees, customers and competitors. For them, it will reinforce the idea that caution is imperative right now, that risks must be avoided.
This is no small matter. Just how widely this risk-averse thinking takes hold will greatly influence where our economy heads next.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.