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Do as Reagan Did, And Free Credit Unions
Do as Reagan Did, And Free Credit Unions
December 07, 2012
Originally published in National Review
In their post-mortem on the election, National Review’s editors stressed the need to “make the case that conservative policies would make the broad mass of the public better off” by “link[ing] small-government principles to attractive results.”
The editorial suggested that, most of the time, conservatives will be “duty-bound to oppose” the president’s policy proposals, but added that if Obama were to offer “some other worthwhile policy, conservatives should be willing to bargain with him,” all the while “articulat[ing] better alternatives.”
They have just such an opportunity with regard to a certain type of banking regulation. The Obama administration and Senate majority leader Harry Reid (D., Nev.) have committed to a modest deregulation the rules governing credit unions. They are supporting bipartisan legislation that lifts by a small amount the arcane member-business lending (MBL) cap, which severely constricts credit unions’ ability to make business loans to their member depositors.
Solid economic evidence shows that raising this cap — from the current limit of 12.25 percent of bank assets to 27.5 percent in the pending legislation — would have substantial benefits on businesses and job growth. The Credit Union National Association estimates that this increase in the cap would create 138,000 jobs in the first year, a figure that Pepperdine University economist David M. Smith calls “conservative and well within the bounds of a reasonable projection.”
Further, this policy change would merge good policy with good politics. Credit unions — nonprofit cooperative financial institutions owned by their members — enjoy popularity with the vast majority of American voters. A recent survey by the Temkin Group found credit unions to be among the businesses that “consumers are most likely to trust.” In the swing state of Wisconsin, for instance, 80 percent of voters want politicians to give credit unions greater freedom to lend more to their members’ businesses, according to a recent survey.
Based on the economic and political support, GOP congressional leadership should formalize their support for the bipartisan House and Senate bills that already boast the sponsorship of many conservatives in Congress, and are backed by free-market organizations such as the Competitive Enterprise Institute, Americans for Tax Reform, 60 Plus Association, American Commitment, Citizens Against Government Waste, and Campaign for Liberty.
Republicans should also go one better and propose to repeal the business-lending cap in its entirety, a free-market policy that would also have political appeal for the nation’s millions of credit-union members.
One would think lifting burdensome government regulations would come naturally for conservatives and the GOP. The bills are co-sponsored by Repesentative Ed Royce (R., Calif.), Representative Darrell Issa (R., Calif.), Representative Ron Paul (R., Texas), and Senator Rand Paul (R., Ky.). But some Republicans appear to have been cowed by the banking industry’s relentless lobbying against extending what many banks perceive as special privileges for credit unions.
As NRO readers know, I am often first in line to defend the banks when they put forth legitimate grievances against wrongheaded policies such as Dodd-Frank (the burdens of which policies often hit credit unions hard as well). I must part company, however, when banks seek to squelch competition from credit unions for borrowers and depositors.
Banking lobbyists tend to criticize the perceived tax advantage of credit unions, but this benefit is exaggerated and largely irrelevant to the issue of whether it is wise policy to lift restrictions on their ability to make business loans. Credit unions are exempted from taxation at the corporate level because they are member-owned cooperatives that don’t have the many means of raising money that banks do (such as the issuance of shares of stock). Credit-union members, however, are fully taxed on the dividends on their accounts, and are taxed at the ordinary income-tax rate for interest, rather than the lower rate for dividends.
Conservatives and libertarians have long argued that business income should only be taxed once, and credit unions provide a successful example of a single-taxation model. Some smaller banks are also eligible to be incorporated as subchapter S corporations, a single-taxation structure very similar to that of credit unions, giving them similar advantages of single taxation anyway.
Moreover, it is a bit rich for the nation’s banks to complain about unfair subsidization after they received more than $1 trillion in taxpayer largesse from TARP and other bailouts — including the “temporary” Transaction Account Guarantee (TAG), which provides unlimited deposit insurance to noninterest-bearing checking accounts, a policy the bank lobby is now pushing to extend.
When the banking industry lobbies for Big Government, as here, it affords the Republican party an opportunity to go a long way toward, in the recent words of Louisiana governor Bobby Jindal, “mak[ing] sure that we are not the party of big business, big banks, [and] big Wall Street bailouts.”
Prudent credit-union deregulation also carries on Ronald Reagan’s successful legacy. In fact, lifting or repealing the business-lending cap would help restore the Reagan regulatory reforms that jump-started the 1980s economy. Reagan heaped praise on credit unions in 1984’s Presidential Proclamation 5211, touting both their entrepreneurial and their communitarian values, which are also core aspects of conservatism. He proclaimed:
Credit unions are uniquely democratic economic organizations, founded on the principle that persons of good character and modest means, joining together in cooperative spirit and action, can promote thrift, create a source of credit for productive purposes, and build a better standard of living for themselves. Because credit unions exemplify the traditional American values of thrift, self-help and voluntarism, they have carved a special place for themselves among the Nation’s financial institutions.
By liberating credit unions from decades-old red tape, Reagan helped show the American public the benefits that deregulation can bring to Main Street. The late Edgar Callahan, Reagan’s chairman of the National Credit Union Administration (NCUA), lifted barriers to credit-union modernization, such as allowing mergers of credit unions in different regions of the country and with different fields of memberships.
These moves not only allowed more Americans to choose credit unions; they also strengthened credit unions’ financial solvency by making them less vulnerable to volatility from certain regions and classes of membership. Upon Reagan’s death in 2004, an article on the website CreditUnions.com stated that “perhaps no aspect of the economy owes more to Reagan’s philosophy of deregulation than the credit union movement” and that “the Reagan legacy means that individuals can choose a cooperative form of financial services in most communities today.”
BUSINESS-LENDING CAP CREATED AS REACTION TO REAGAN RULES
Unfortunately, since the 1980s, banks have been trying relentlessly to squelch the competition that Reagan unleashed. They have filed lawsuit after lawsuit against the liberalized rules, and they finally succeeded in 1997, when the Supreme Court ruled in a narrow 5–4 decision that Reagan’s liberalized rules technically violated the New Deal–era statute governing credit unions.
By this time, however, millions of Americans had joined credit unions and let Congress know that they didn’t want this option taken away. So in 1998, Congress largely codified in legislation Reagan’s executive-branch deregulation that had been struck down by the Court months before.
But the bank lobby did get one concession: The new law imposed a cap on the amount of business loans credit unions could provide, a cap that exists to this day. That cap, which sharply restricted the business-lending activity credit unions had engaged in going as far back as 1908, is now holding back the small-business engine of the economy.
Even with this limit, many credit unions are doing what they can to fill the gap in small-business credit. Two of the nation’s largest credit unions, Navy Federal Credit Union and Pentagon Federal Credit Union, are helping many veterans start their own businesses.
But the cap prevents these and other credit unions from expanding their business lending even more, hampering small-business and job expansion. Meanwhile, the nation’s top credit-union regulator has said there is no safety-and-soundness reason for keeping credit unions from filling this need.
NCUA chairman Debbie Matz, an Obama appointee, told the House Financial Services Committee last year that business lending “did not have a major impact on the safety and soundness of the vast majority of credit unions” during the downturn. Matz added further that an increase in “business lending is another way in which to prudently manage risk.” Credit unions, after all, face no such cap for home mortgages, and after the financial crisis, it’s difficult to argue that business loans are somehow inherently more risky than mortgages.
Given this bipartisan opposition to the business-lending cap, Republicans should take the lead in easing and ultimately repealing it. They should then use that victory as a stepping stone to liberate banks and credit unions — as well as American consumers and entrepreneurs — from the shackles of Dodd-Frank. This should further please Main Street banks, businesses and customers, if not the Washington-based banking lobby.