Popular rhetoric to the contrary, credit unions are not a winning alternative to the commercial banking system. Both are bad options. by Walt Thiessen
(libertarian)
Sunday, October 31, 2010
Like many people, I periodically comment on articles I read by other readers at popular websites. Lately, I've seen more and more comments by angry citizens, calling for people to pull their money out of the commercial banks and put it into credit unions instead. In essence, they're claiming that your money will be safer and that it will punish the commercial banks.
An example of such a discussion was initiated at cnn.com this week. One particularly angry poster wrote, in reply to another poster with whom he disagreed:
"It isn't about what is owed or by whom. It is about the FRAUD committed by Banks from the very beginning, you moron."
I ignored the unnecessary personal attack on his adversary and replied to his comment in a different vein. I wrote:
Actually, that's only half right. Think of it this way. Whose money did the banks lend out in the first place? Was it their own money? Of course not! The original fraud wasn't that they deceived people when they loaned them money regarding the terms of the loan. The original fraud was that they loaned out money that didn't even belong to them in the first place!
This person very kindly wrote back, saying:
"Good point Walt. Which is one more reason for people to leave Banks altogether. Although there has been a small migration to Credit Unions, it isn't enough. People need to migrate in large numbers. If 50% of all bank account customers migrate in a very short time frame it will not only hit the banks hard in their 'Bottom Lines', but it will signal a larger response by the remaining bank customers to do the same. Until this happens banks will continue to do 'Business, as Usual'."
There it was again, the blind faith I have observed that so many people have in credit unions. They think that since the depositors are the owners of the institution, credit unions must be a better deal.
I wrote back to him the following:
Thanks Steven. Unfortunately, the solution you suggest is no solution, because credit unions engage in the same practices as banks do. The only significant difference is that credit unions do make it clear that your deposited money will be loaned out.
However, given the fact that there are NO bank-like institutions of any kind where one can participate with a checking or savings account in the modern day economy WITHOUT the money being loaned out, saying that credit unions require you to give your permission to loan out your money is a distinction without distinction.
With a credit union, you get the choice of giving your permission to loan the money out, or not participating in the modern tools of economic exchange at all. That's no different from commercial banks.
Like banks, credit unions count liabilities (deposits) as assets, thereby expanding the money supply and contributing to the devaluation of the dollar.
Like banks, credit unions trade only in fiat, debt-based money. You can't deposit gold, silver, or other precious metal money in a credit union.
Like banks, you can't prevent credit unions from loaning out your money.
Like banks, when credit unions make mistakes (and let's be honest...everyone in business does that), it's the depositors who are at risk.
Since credit unions fail at an even higher rate (number of failures compared to total pool) than banks do, and since they contribute to the dollar's loss of value proportionally to what commercial banks do, there is clearly no advantage in putting one's money in a credit union...not to mention a significant disadvantage.
I read a post one time by someone questioning how safe credit unions were. He went in to his local credit union to ask about opening an account and asked the credit union's officer how much of the money they had in their vault. They behaved like he was casing the joint to rob it. When he clarified that he was worried about getting his money back, they pointed to the FDIC poster on the wall.
Anyone who truly understands the FDIC knows that it is really false protection. The reason the big banks were "too big to fail" is that the FDIC couldn't cover their losses. Further, the FDIC doesn't charge its member banks and credit unions based on risk. Instead, they charge premiums based on deposit totals. Thus, the institutions which take the greatest risks are effectively subsidized by those institutions which behave in the more prudent manner. Which approach do you imagine is more profitable under such circumstances? That's right. Risky lending becomes the better bet when you can always count on the system to bail you out of your troubles. It's a no-lose situation for the money suckers.
No, the solution is not to pull money out of commercial banks and put it into credit unions. If only it were! But in reality, it accomplishes nothing.
The only REAL solution is to press for systemic change, to outlaw legalized fraud (including fractional reserve banking), to outlaw legally-required currency monopoly ("legal tender" laws and the outlawing of gold and silver as money), to legalize the use of precious metals as money in a competitive currency system.
Only then will we see a better, more equitable system that rewards the poor, working class, and middle class for their hard work without sucking all the value of their money away into the hands of the top bankers, politicians, and wall street gurus.
Only then will we finally achieve prosperity for all.
Only then will we finally wipe out poverty world-wide.
Only then will governments be deterred from engaging in war-based foreign policy (because without fiat, debt-based money, war becomes too expensive to conduct on a regular basis).
Only then will we all be much, much better off.
There are millions of such exchanges that take place on the Internet today. While I obviously can't involve myself in more than a fraction of them, I am determined to do what I can to help people understand that band-aids won't work. We need dramatic, systemic change as soon as humanly possible if we're to avert the worst of the coming debacle.
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Very interesting reply to that guy who was calling someone else a moron.
The only problem with the REAL solution that I see is that it will never happen. Our politicians and government control TOO MUCH of our lives and money to let it go that easy and the people don't know much about it. So the only way your solution would happen is with a bloody revolutionary war that will take over the government. The problem with such revolutionary war is that we may end up worst than what we started because the rule of law will be taht of a dictator as was the case in Cuba with Castro among other places. Also, with the US Defense's budget such takeover is impossible to achieve.
I don't see the people raising up agaist the system any time soon.
The "legal tender" laws as I understand does not prevent you or me from using other kinds of currency as transactions, BUT when such change takes place, we have to pay income taxes in US dollars thus forcing us to pay in US dollars and that is where we get screwed. Today I can legally pay you 2 ounces of gold to advertise here on your website, but you are now required to report that as an income so you have to pay about $500 of those 2 ounces to the IRS in taxes. You have to pay that in US DOLLARS even though you did not receive any dollars. Is that what you mean by the unfairness of the "legal tender" laws?
Another example of how the "legal tender" laws as I understand them could be heavily seen in low-income communities. People in low-income communities need to survive on any means. Example: Lets say Joe has a child, and can't afford childcare while he goes to work to earn money. His neighbor Mary offers to provide the child care as long as Joe maintains Mary's property by doing handiman work, painting, mowing, etc... and NO CASH is exchanged bewteen these two parties. These kinds of arrangements happen ALL the time in low income communities because they need to survive. The problem is that under current law, this otherwise legal arrangement is ILLEGAL. Why? Because neither one of them is paying taxes on the income generated from the services that they are providing each other (and that's not even taking into account the regulations and licenses). Under current tax law, Joe is required to report the equivalent income generated from the handyman work done to Mary's house but can't take the child care expense as a deduction because is a personal expense and Mary doesn't have a child care license. On the other hand, Mary is supposed to report the equivalent income from her child care services and can't deduct the work that Joe does to her house as those are her personal expenses. So both Joe and Mary are supposed to pay taxes on money they haven't earn and using US dollars that they haven't received. Of course it is almost impossible for the IRS to audit and demand payment on such transactions, and Joe and Mary wouldn't even know that they are breaking the law. Oh and don't forget they also have to pay social security on those wages too. So why we have such laws to begin with? Just the fact that taxes on barter exist even though they are unenforceable, pushes the people to use the US dollars instead of any other currency they see fit (their time spent on a job is also a form of currency).
Am i getting this right? Is this what you mean by "legal tender" laws?
One more thing, I do understand your comment: "Only then will we see a better, more equitable system that rewards the poor, working class, and middle class for their hard work without sucking all the value of their money away into the hands of the top bankers, politicians, and wall street gurus."
but I don't understand this one: "Only then will we finally wipe out poverty world-wide."
To wipe out pverty world-wide? That statement seems to be too extreme. Think of places like Haiti. That place is beyond fixing. All their natural resources have been depleted. When you have no natural resources you have no wealth, no currency, NOTHING. So what are they going to exchange? What "free flowing" currency can they use when they have NOTHING. I can't think how fixing global currency laws will fix a place like Haiti.
Posted By: Walt
Date: November 4, 2010 03:03:53 PM
but I don't understand this one: "Only then will we finally wipe out poverty world-wide."
To wipe out pverty world-wide? That statement seems to be too extreme. Think of places like Haiti. That place is beyond fixing. All their natural resources have been depleted. When you have no natural resources you have no wealth, no currency, NOTHING. So what are they going to exchange? What "free flowing" currency can they use when they have NOTHING. I can't think how fixing global currency laws will fix a place like Haiti.
Let me know what you think.
I admit it sounds grandiose. Besides Haiti, I could name a few other places that seem desperately hopeless, such as Afghanistan, the Sudan, and Angola. However, let's look at the matter more carefully.
We know that debt-based money and fractional reserve banking draw the value out of the money supply over time. We also know that this activity harms the poor the most, and in extremes can create incredible levels of poverty and hardship.
Now, picture a miracle happening where those countries lose their fiat currencies, and they are replaced by gold and silver, or even copper, as currencies. Every one of those countries have experienced tremendous debasement of their monetary systems. Afghanistan, for example, took three zeros off their currency about eight years ago. Thus, a 10,000 Afghani note was replaced by a 10 Afghani note. Now that's serious debasement! There is no way in the world for anyone but the wealthiest people to survive under such a system, and indeed that's been the case. But if the money supply was fixed in size, such as with a precious metal, the ability to debase would disappear (or at least be drastically curtailed overnight).
Now, why do I think that the U.S. adopting major currency changes toward hard money would affect Afghanistan within a generation? It's very simple. It would only take a couple of years for the rest of the world to see how dramatic the turnaround in our own economic fortunes would be. The populations of other countries would champ at the bit for similar reforms in their own countries. Many tyrants would resist, but the potential flow of trade would overwhelm their ability to continue to keep hard metal currencies out.
One of the only things that keeps the fiat system going is the U.S. dollar. The historic stability (relatively speaking) of the dollar compared to other fiat currencies made it a natural reserve currency. Replace it with a currency system that actually retains its value, and which can't be easily manipulated, and all the fiat currencies of the world would collapse very, very quickly indeed. The world clamor for the other governments to join the same system would be overwhelming.
There are a few instances in history, particularly here in the U.S. during our own colonial era, when fiat currencies were abandoned in favor of hard currencies. In each case, the result was the same. The economy recovered within a matter of MONTHS (not years!). The effect is truly dynamic.
So when I said poverty would be wiped out in a generation (which I measure as 20 years), I was actually being pessimistic. It's actually much more likely that dramatic world-wide economic change would happen within just a few years.
That sounds fascinating, Walt. Although I can't take your word for granted on why it will eradicate poverty from the World, it iis motivating me to go deeper into this subject. I hope you are right with that analysis. I want you to be right with that analysis. But as a skeptic I would need some prove which you probably can't provide. In present history, we don't have such system and it is difficult to guess or predict what happens. Even though you explained it properly, I can't fully comprehend (my fault not yours). I'm going to read and think more about it to fully understand. I just don't see it having any impact on misery now. I'm going to keep thinking about this until I get it. Thaks for the reply.
