The following is my stab at the annual outlook. This is Part I. I posted the commentary on the WesCorp web site as well if you visit that one. —–
Remember back to a kinder, gentler time, specifically January 1, 2000. Our only worry, or so we thought, was would our computers turn on that morning? Once that mini-scare was behind us, we were free to be excited about the first decade in the new millennium. Well, we should have known we were in trouble when no one could even figure out what to call the decade – the aughts? naughts? the oo’s? double zeroes? Nothing ever really clicked for the entire ten-year period. I think I finally have the name for the decade. It’s the “orphan decade”. It’s the ten-year period no one wants to remember or look back on with fond memories.
2009 – A “Learning” Experience
As I started to think about writing this 2009 review and 2010 outlook, I started to think of all the bad things I could say about the decade. Here’s my Top Ten bummers of the decade past: 1. 9/11 2. Hurricane Katrina 3. 2005 Indonesian tsunami 4. Two U.S. wars 5. 2000-2001 bursting of the NASDAQ bubble 6. 2008-2009 stock market collapse 7. One gigantic housing bubble and crash 8. One near-miss global financial meltdown 9. Worst job losses since the Great Depression 10. Tiger Woods. Okay, maybe not #10, but there was much to loathe about the decade. Before I started writing this, I read in various business journals and general newspapers other “odes” to the decade past. The common theme was it was the worst decade ever and better forgotten quickly. The tomes were so brutal I started feeling kind of sorry for the decade. (I’m not sure you can feel sorry for a period of time, but I do if you can.) So rather than insult and then forget the aughts or 00’s, maybe we should spend some time trying to figure out what we learned the past ten years and how that can help us going forward.
First and foremost, we should remember that the last ten years were probably great for many people. People got married (hopefully still happily), had babies, got degrees, were promoted, got new jobs, etc. Life isn’t just about macro events that impact the world. Second, we learned that the threat of terrorism is something that will be part of our lives for decades to come. I think we’re well on our way to adjusting to whatever new inconveniences preventive measures might cause. (Although if the Shoe Bomber made us all take off our shoes at the screening, I don’t even want to think about the changes coming from the Underwear Bomber.) Third, Mother Nature will always do her thing. But we should try to be better prepared and limit consequences.
The rest of the items on my personal bummer list are things of an economic and/or financial nature. You might not agree with some of the lessons, but these are my takeaways. When it comes to the stock market, I think many time-honored adages melted away this past decade. Buy and hold, average in, and the 10-year virtuous cycle theories all withered in the debacles. We were fortunate to have two decades (1980-2000) in which those conventional pearls of wisdom held up well. But the past decade should have taught us that those days are over. We’re going to have to be much more opportunistic. If you were fortunate enough to sell stocks before the meltdowns in 2001 or 2008, you came out well. If you bought stocks early in 2009, you’re a shining star. Unfortunately, the opposite actions were not friendly. The point is that the financial world is more complicated and unpredictable than ever, and information travels faster than ever forcing quick decisions. The globe is more interconnected, and that means we are no longer complete masters of our own fates. There will be a lot of opportunities ahead, but this is no longer a one-way street.
On the housing front, the lessons learned there are numerous, and I’ll just mention a few. We should have learned that a house is a place in which to live; it’s not an asset plan for retirement. As borrowers or lenders, we should have learned that what matters is the ability to repay debt based on income, not on the perceived future value of the collateral. We should now know that the mortgage securitization market is years away from functioning outside of Fannie and Freddie. The government will keep these beasts alive at all costs. By failing to allow the capital markets to deal with the fallout from the mortgage debacle and the agencies’ roles in that debacle, the government has effectively taken over the mortgage business for years to come. It’s going to cost us.
The lost decade in the job market has some very hard lessons for the future. The divide between upper-management and wage-earners has grown to canyon-like proportions. Executive compensation based on short-term results is what drives most businesses now, not long-term benefits for stock holders or employees. Management is rewarded for making quick and draconian cuts at the first sign of a slowdown. The wage discrepancy and lack of loyalty to employees really doesn’t mean much when jobs are scarce, as they are now. There can be no employee backlash. But as some point in the future, jobs for good workers will become more plentiful and competition for well-trained and knowledgeable workers will increase. Companies which have shown no respect for employees will be at a distinct disadvantage. Again, I said these are lessons we should have learned. But based on the way we still see businesses operate, few have thought that far ahead.
Perhaps the one area in which more lessons were there to be learned was in financial institution arena. Since money makes the world go around, it’s vital to keep that money flowing. Yet, we came within a hair of witnessing the upending of the entire financial structure. So, we should have made progress on getting away from the “too big to fail” mentality which almost destroyed the system. We should have made progress on derivative market reform, especially regarding credit default swaps. We should have made progress on reforms in accounting and loss recognition on bank balance sheets. We should have started to deal with long-term solutions for Fannie and Freddie other than throwing in the towel and just having the Treasury and taxpayers take on the burden of the mortgage business. We certainly should have learned that bankers will always shoot-for-the-moon when given access to virtually free money for funding. Yet, nothing has changed. The lessons were there for the learning, but we (collectively speaking with the government) seemed be paralyzed by the initial shocks and then were inept at developing and implementing any future vision. With global investment bankers now emboldened by the “miraculous” recovery and the lack of governmental demand for changes and protection, the opportunity for reform is slipping away. This means the opportunity for the next meltdown is around some corner ahead.
As credit union leaders, I’m sure you have your own list of lessons learned. Even if you fared very well in the last decade, there is always something to learn. I won’t guess. But, there was one broad lesson that covers a lot of credit unions. Capital. Over the past go-go decade, a lot of credit unions came under pressure for being over-capitalized. How dare you be so conservative when times are great! Can’t you see all the growth opportunities you’re missing? Of course the lesson is in Aesop’s tale of the ant and the grasshopper. Even more relevant is the history of the founding fathers of Bank of America who were criticized for being conservative during the good times, like the 1920’s, in order to be there in the bad times. That’s not to say credit unions shouldn’t strive to do everything they can to serve their members. But credit unions should maintain some sense of what is truly in the interest of members and what is just in the interest of growth for growth’s sake. Overall, most credit unions did resist the siren call of straining capital during those good times, but to me it’s still the lesson of the decade for all financial institutions – there is no shame in saving for a rainy day.
Thanks for indulging me with some “bigger” thoughts about the decade we have left behind. After finishing the annual forecast write-up, I decided it was probably a little too long for one sitting for most of us. I will follow this review of the past with Part II of the commentary in a few days in which we’ll get back to the grind to see what’s ahead for 2010.