As I edited Lynn Kuehne’s book early last year, his numerous references to the book Secrets of the Temple, by William Greider, led me to read the book. I thought I’d offer up some observations after reading the 700-page monster.
The book chronicles the late 1970s and early 1980s, when the Federal Reserve pushed interest rates sky high, and the sent the country and world into a recission. In a book that thick, it covers a lot of ground, heading off into interesting and cogent tangents.
For example, as almost a side note, Greider describes the International Debt Crisis of 1982, in which the Federal Reserve and many banks worked to bail out Mexico and other nations because those countries defaulting on their debt would have hamstrung American Banks.
In another tangent, the book outlines how Penn Square, a $500 million bank, had participated out $2 billion in loans which turned out to be bad. So, when that small bank failed, its failure rippled through many other, larger banks. The book describes how the bank board should have managed its institution, taking harsh measures to stop bleeding before it became fatal.
The author also describes amazing growth of some banks, which turns out to be too good to be true, and examiners and regulators not making prudent recommendations or taking strong action when necessary, due to being caught up in the mood of the times.
I could go on—for example, about the debate the Federal Reserve went through on whether to bail out banks or not, to make depositors whole even above the $100,000 guarantee, bank deregulation, etc.
Overall, it felt timely—almost prescient—in 2023, what with our current interest rate environment, SVB and other banks failing, the debt ceiling, and endless talk of possible recession. It does, indeed, feel like history echoes.
It’s hard to know what lessons, exactly, to take from the book, but I’m left feeling slightly ill at ease. There’s just a great deal out of our control. The average credit union leadership team—and consumer—is at the mercy of a few people making decisions in far-away board rooms. Those decisions affect the broad, high-level state of things, which affects everything below it.
Another reason I feel uneasy is because, in retrospect, according to the book, the Fed was making decisions on bad information. For example, it would decide to ease or tighten based on its calculations of the money supply, and the money supply was based on certain assumptions about how quickly money turned over. Well, at times money was turning over more slowly. So, the Federal Reserve thought there was more money out there than there actually was. This led the Fed to tighten, and exacerbated the dismal state of the economy.
Aside from making me slightly queasy, the book reinforced a concept that I’ve held onto for years: there are many levers that the government can tinker with to change the state of things, but there are also a lot of outputs, and it’s very difficult to predict with too much certainty what outputs will change at the pulling of which levers. In other words, there are unintended consequences.
This is no new insight, of course. But we’re seeing it today in the financial services industry. Now that we’re through the pandemic, we’re starting to see some of the long-term the results of actions taken by government: inflation increased, leading to the need to slow the economy down, leading to the increase of interest rates, leading to the ballooning of credit union CD balances, and the squeezing of margins.
It could be that, when during the pandemic Congress was making the decision to flood the economy with stimulus money, it knew full well that it would end up squeezing credit union margins. I suppose some economist somewhere made that prediction. But I don’t think most people making the decisions thought it through. It just feels like the more the government tinkers, the more unintended consequences it produces.
(This is part of the argument against Durbin 2.0, which Congress is currently considering: Durbin 1.0 caused many unintended consequences.)
Another take-away. Banks have a long history of not working out. They regularly need to be bailed out by the government. Or they lose depositors’ money. Then laws are passed. Regulations get put into place. More safeguards are established. And yet, at some point, some way, bankers find their way around those and eventually cause trouble again.
Very often, this trouble comes when fundamentals are forgotten. Sound underwriting. Diversification of risk. Strong liquidity. All in the pursuit of profit for the stockholder. Credit unions, not beholden to stockholders, certainly can function as an instrumentality of the Federal government to keep things sane.
One last take-away: I walk away from the book feeling like financial institutions should manage their practices conservatively, because you never know when the economy will turn, or when something really amazing turns out to be a skunk. Just ask the financial institutions that were a little too deep into speculative construction lending in 2006-2009.
The challenge, though—the real challenge—is being progressive as a financial institution while managing that risk. Because you want to move forward in providing products and services to members, and staying relevant. At the same time, a credit union can’t lose money. So a leadership team must take risks. It must make choices knowing that someone, somewhere, could make decisions that turn your once-good decision into a bad one.
So, I’m left at a point where Heather Line will be thrilled: risk assessments. It’s critical to stop and assess risk along the way, and make a plan to manage that risk. What could go wrong? What will we do to mitigate the effect if it does go wrong?
Anyway, it’s a strange lesson to take from a book with the subtitle of “How the Federal Reserve Runs the Country.”
If you’ve got time for something of that length, I recommend the book. I suspect that you, like me, will leave the experience slightly ill at ease, wondering how the financial system manages to function through the decades.