Recession has psychological impact on consumer

Spending savings is not an easy thing for the consumer, writes Bill Hobbs

In urging us to spend our savings, Minister Noonan sounded like King Canute in reverse. Instead of commanding the tide to stop coming in, he is trying to command the tide to stop going out and come back in again. The problem for the Minister is while the export sector is doing well, the domestic economy isn't. It’s continuing to contract as we save more and spend less of our reduced incomes.

The psychological impact of one of the most dramatic of economic reversals means that we will not feel safe to act as consumers for some time to come and we will probably never spend as we did in the past, ever again.

We have woken up to just how vulnerable we really are. And we may be learning how to use money wisely, particularly its most dangerous kind - credit. 

Two things are happening. We are saving more and paying down debt faster than before.

During the boom, the wealthier we felt the more we spent and the less we saved. As we believed our earnings would continue to grow, we expected our future income would finance current consumption. We spent more than we earned by borrowing money.

While many of us lived comfortably within actual income, others, buying into the boom time metaphor of the irreversible high tide that lifted all boats, lived within their anticipated incomes. It was a tide that had to turn and when it did, it retreated faster than it came in.

While high tide has left its physical mark seen in part-finished housing developments and empty office buildings that are likely never to be completed or occupied, there is another mark which is just as indelible. It’s our behavioural response to the destruction of household wealth. 

Because we now feel poorer, we are spending far less. And as we fear tomorrows income may be less than today’s, we are living not only within today’s income but increasing our precautionary savings.    

For certain the tide will never rise as far as it did ever again. There will be no returning to credit fuelled boom time consumerism as we change our behaviours to live a new shared reality. 

That reality is being created through metaphor, narrative and story telling. We make sense of things through the stories we tell each other. While we may not have lost our job, we know stories of people who have. While our incomes may not have reduced too much, we know of others who are living on social welfare having exhausted their savings and redundancy payments. While our children may have a job, we know of others who have emigrated.

We are spending less and saving more as we have learned the brutal lesson of the dark side of consumerism which only works when we borrow from tomorrow to spend today. While not all is us are poorer, we all feel and act poorer. When we are uncertain about what tomorrow will bring we squirrel away what we can and stop spending what we can. And while precautionary savings are increasing, because we fear tomorrow will be worse and not better, our spending behaviour is also changing. This change will last long after the precautionary impulse wanes. One thing is for sure as we now demand higher quality goods and services at fairer prices then suppliers will have to meet our expectations. Until prices come down to meet our expectations there will be no reversal in the decline in consumer spending.

Is there is an emerging future barely visible at this time? A future where lessons learned will be put to use. By unlearning compulsive consumption habits we will probably spend far less and save more of our disposable income for a long time to come. We will never again borrow from tomorrow to spend today. We have already started on this path. Our behaviour illustrates not just a fear for the future but a deeper shift to a more prudent, far less exuberant consumerism.

Just as King Canute couldn’t command the tide to turn back, Minister Noonan can’t command it to some back in. It’s continuing to retreat and when it does come back in it will never reach the high watermark it once reached.

If this is the case then any national plan for the future must accept that economic recovery will be different this time. Sure we will need to export out way out of this mess but we will also have to adjust our expectations of what domestic economic recovery will be like. Has a shift to the wise use of money and prudent, pragmatic, value seeking consumerism been factored into economic forecasts?

A version of this article appeared in the Irish Examiner, Business Section, Monday 27th June, 2011. 

Credit unions finally face up to modernisation

After a number of reports, credit unions are facing an overhaul, writes Bill Hobbs

It was announced last week that Government has tasked a credit union commission with defining the future of the sector and recommending enabling legislative and regulatory systems.

Given entrenched vested interests that have consistently frustrated reforms, it won’t be an easy task. The commission will succeed if it manages to craft a purposeful strategy having the support of all stakeholders for a comprehensive transformation programme.

Of the national network of 409 credit unions, at least one in five will have to merge with others in the next year or so. It’s a long overdue rationalisation that may reduce the number of credit unions to about one hundred. While the number of credit unions will reduce, should they modernise their business model and achieve economies of scale and scope through a centralised shared service organisation, as their international peers have shown elsewhere, it is highly likely the numbers of outlets and delivery channels will increase.

Such a change would be the largest and most comprehensive rationalisation programme of any financial institution in the history of the state. If properly thought through, planned and executed, a transformation programme could result in a vibrant modernised credit union sector similar to those found in Europe, North America and Australia. It could see credit unions becoming a principle provider of high quality affordable financial services to ordinary people.

Long before 2008 credit unions were at risk of an external shock negatively impacting on financial stability. Their business model contains a number of flaws. Emphasising dividends paid from profits, the inclination of voluntary boards and their managers was to adopt risk adverse practices focused on maximising dividends and to compete with one another to pay the highest rate. This behaviour led to them eschewing investment in diversifying products and services and adopting market based pricing mechanisms. It also came at a cost of building the reserves required to ensure economic viability and sustainability and investing in improving operational competencies.

Financial fragility was exposed in 2006 when a run on a large credit union threatened to become contagious. At this time a report highlighted extremely high levels of delinquent loans which were not being provided as bad debts in annual accounts. Many credit unions were manipulating bad provisions to bolster dividend pay-out rates. Later that year credit union investments in high risk instruments they should never have invested in, became public.

What wasn’t so public was that moves by the credit union regulator to reign in risk taking were being frustrated by influential directors and managers. A worrying number were quite deliberately and knowingly breaking laws designed to protect against risk taking. As they considered laws limiting risk taking were out of date, they argued they could ignore them. Hamstrung by one of the weakest of credit union legislative regimes in the advanced world, the regulator was almost powerless to act. What limited interventions it could make were made, but its increasingly robust warnings and advice were ignored.

The banking and economic crisis are not the root cause of credit unions troubles despite what some would have others believe. In a recent speech, the Central Bank summarised why the system has become so fragile “For those increasing number of credit unions who now find themselves in financial difficulty there is a recurring trend – they have been poorly governed by boards and management and effective oversight by the supervisory committees has been non-existent. "

While chief executive of trade body CUDA, I published in late 2006 an important report on the future of the sector and called on the then government to set up a commission to see to it that long overdue reforms where implemented.

The report, “A Call to Action, re-inventing credit unions for the 21st Century”, listed eight key recommendations which if implemented would have modernised the business model, improved governance and management competencies, rationalised the sector, improved products and services, improved regulation and legislation and provided savers with a deposit guarantee.

It is telling that five years later only one recommendation has been implemented. When faced with a contagious run on credit unions in September 2008, Government extended its deposit guarantee to cover credit union savers’ funds.

It’s good that Government finally got round to setting up a commission to consider the future of credit unions. As its membership reflects vested interests, balanced by the inclusion of academic and some other expertise, will it be capable of acting as a positive force for change or will it become captive of the past and produce convenient fudge? It has to be of some concern that business expertise in credit co-operative transformation and development does not appear to have been included for.

A version of this article appeared in the Irish Examiner, Business Section, Monday 20th June 2011

Committed to a false hope and a failed union

Bad leadership and ignoring the truth has trapped us in a bubble of helplessness and hopelessness, writes Bill Hobbs

Can there be any national renewal if we remain trapped within a political and economic union that willingly visits social and economic destruction on small nations to prop up larger nations banking systems?

Have our political and institutional leadership systems become victims of a confirmation bias that is amplifying our helplessness?

We have become captive the ECB’s dogmatic economic fundamentalism. In fulfilling its role to prop up our banking system, the ECB will not and cannot agree to an organised debt forgiveness programme. Its institutional hubris and arrogance is matched by a Franco/German political nexus that cannot and will not accept sharing the responsibility and cost of a dysfunctional euro system.

Anxious for re-election, German and French politicians remain unwilling and incapable of addressing the fundamental problems at the core of the euro-zone project.

Our growing sense of helplessness at the hands of the IMF/ECB/EU “troika” is exacerbated by a reluctance of Government to admit to the consequences of applying a remedy that will destroy the social and economic systems needed to rebuild a shattered economy. Is this the only response to the structural violence visited by an omnipotent central bank’s narrow mandate to protect larger more powerful Euro-zone members? Why are our leaders so willing to adopt ways of doing things that are undermining our capacity to rebuild our economy?

Even the troika’s members are conflicted. Both the IMF and some EU participants appear to favour organised debt forgiveness but the hawkish ECB and other EU participants remain rooted to a dogmatic demand for reparations.

With international and independent analysts all saying that we cannot afford to repay what we owe, why is this compelling, factual based evidence not being acknowledged and acted on?

When we are faced with news that blatantly conflicts with what we believe to be true we use the information to support our beliefs. When we think we know something to be true our immediate reaction to news indicating the polar opposite is to jump to the conclusion that there must be something wrong with the source.

When faced with overwhelming, contradictory factual evidence why do we not pause for thought? Are we thinking at all? According to one recent study of brain activity, it seems we don’t think. When processing contradictory statements, it appears that not only do we suffer from confirmation bias but the part of our brains associated with reasoning reveals no sign of activity at all. Even more startling is once we interpret news to reconfirm our beliefs, the part of our brains involved in reward and pleasure become active.

We reinforce what we believe to be true, eliminate negative emotions and activate positive ones. We reward ourselves for being able to stick with our original position. Our emotional reactions and not our thinking minds cause us to be even more passionately committed to original beliefs.

Perhaps this explains our Government's passionate commitment to repaying every cent we owe even when others know we cannot. Is the overwhelming evidence that the Euro project is failing being perversely used to confirm a commitment to the Euro project?

Our Government is committed to do what needs to be done to regain economic sovereignty even if this means enforcing the structural violence demanded of external “partners”. Could it be that it’s conformational bias blinds it to other alternatives and its communications are reinforcing a belief in helplessness and its dangerous twin, hopelessness?

One of today’s glaring institutional vacuums is a singular lack of transformational leaders that sets out a clear inspiring goal, tells the truth, commits to change, fights for what ordinary people want, communicates using inspirational narrative and not mind-numbing detail, directs its attention to what’s right and not what’s demanded by others and elicits an enthusiasm in us all that we can build a better future.

During his Congressional address in 1862, Abraham Lincoln said “The dogmas of the past are inadequate to the stormy present…..As our case is new, so we must think anew, and act anew. We must disenthrall ourselves”

There are many who think that in dealing with the stormy present we need to disenthrall ourselves of an economic fundamentalism and its dogmatic insistence on the unnecessary and punitive destruction of our capacity to build a better future.

What is needed is transformational leadership that defines the common good not in terms of repaying debt but defends the pre-eminence of our own national right to think and act anew.

We need leaders who talk of regaining economic sovereignty not as the goal but as a means to achieving a goal.

A version of this article appeared in the Irish Examiner, Business Section, Monday 13th June 2011

Overhauls needed to rescue the credit union sector

Credit Unions helped to transform Ireland in the past. With the right moves, they can help do it again, writes Bill Hobbs

Credit unions are in serious trouble, their problems are getting worse and they are struggling to respond. One in very two cannot survive much longer as independent entities. One in four is in quite serious trouble. Less than fifty are financially strong enough to operate safely in today’s stressed economic times.  

It is reckoned that the Central Bank’s regulatory strategy will see the network of independent credit unions consolidating from 409 down to about 100.

While the sector has its own dedicated and appreciative regulator, on its own progressive regulatory intervention can only ever facilitate transformation through requiring higher levels of governance and management competencies and implementing robust prudential standards and rules. Business transformation will have to be led and achieved by credit unions themselves. Yet most do not fully understand the magnitude and impact of transformation required.

Unless credit unions are transformed into the type of modern credit co-operative banking system found in other advanced countries, consolidation could amplify their serious, long term problems. That supportive regulatory intervention and consolidation on their own will not solve for these problems is down to two core issues credit unions most resolve. Their business model and co-operative governance and management systems are no longer fit for purpose and will have to be radically transformed.

They will need to migrate to a modern, flexible and responsive business model and invest in enabling information technology and multi-channel branching platforms. But even when enlarged, consolidated credit unions still won’t have the financial resources, managerial competencies or achieve the scale or scope dynamics required to transform themselves. They will also have to co-operate within a cohesive network.

They will need to leverage off their collective balance sheets by ceding strategic and operational autonomy to a higher level, central organisation. Such entities, called apex organisations or central finance facilities are found at the heart of modern co-operative banking systems. They are essential to enabling credit co-operatives improve governance standards, professionalise management and offer better quality financial services to their customers.

Any transformation programme will need to include three elements - consolidation, a new business model and a cohesive network. This would allow credit unions to create a financially robust co-operative banking system, offering a wide range of quality affordable products and services on fair terms, across a multi-channel delivery network of physical outlets, ATM’s, internet and mobile technology.

In Ireland unfortunately credit co-operatives are considered the Poor Man’s banking alternative to the dominant commercial banking shareholder model. This is not the case elsewhere, where as People’s Banks, they fulfil a vital and systemic role in national banking systems.

Regretfully, a progressive proposal promoting a strategic alliance between a building society and a consolidated credit union network, to create a European style federated co-operative banking system fell on deaf ears. It’s a pity, as the proposal would have, if adopted by Government, fast tracked credit union consolidation and transformation into a robust national co-operative banking system.

If credit unions are to play a systemically important role in facilitating economic recovery, they will have to re-discover their enthusiasm for pursuing a common purpose by redefining and unambiguously stating what that purpose is. Articulating a new credit union narrative will take inspirational leadership that encourages the enthusiastic pursuit of a common purpose.  

But the real problem is transformational leadership has failed to emerge. This leadership vacuum is recognised by those concerned for the future of the sector as the single greatest impediment to transformation. Solving for the future of credit unions will take people with the competence, experience and vision to define a national strategy and execute it at local level.

The magnitude of transformation required would tax larger, better resourced institutions. For this reason any national transformation strategy will require Government sponsorship through a dedicated empowered change agent that appreciates “the credit union difference”.

By excelling at delivering affordable financial services on favourable terms, credit unions enhance the financial wellbeing of the people and wider communities they serve. They made an enormous contribution to transforming Ireland in the past and can do so again. But if credit unions are to contribute to rebuilding a shattered economy, they must radically transform the way they do business while remaining true to their guiding philosophy, values and ethos.

To become relevant again they will have to do two things. Define and articulate their purpose for an advanced society and radically transform the way they deliver on this purpose. But change and transformation is almost never initiated or led by incumbent leaders who all too often suffer from confirmation bias, a proven biological disposition where despite overwhelming evidence they are in trouble, they hunker down, defensively protecting the status quo. 

Many believe what’s required is a cadre of transformational leaders and facilitators who can define what a credit union’s purpose is and who can inspire the enthusiastic commitment to achieving it in others.

A version of this article appeared in the Irish Examiner, Business Edition, Monday 6th June 2011