The Wall Street Journal
reports that during the second and third quarter of this year, more
than $110 billion worth of auto loans were made to people with poor
credit (below 660 score), and that nearly 70 percent of those loans were
made to borrowers with credit scores below 620. Some analysts are
correct to see similarities between the current boom in subprime auto
loans with “what happened in mortgage-backed securities in the run-up to the crisis [of 2008].”
The way the new subprime business works is explained very clearly in a post on Bloomberg, "Longer Leash for Subprime Car Buyers in U.S. Stokes Debt Concern."
It points out that one-third of the 14,628 loans recently bought by
American Credit Acceptance (a company that buys and sells debt) were
tied to borrowers with credit ratings below 500. It also explains that a
borrower with bad credit does not get a sweet deal but a loan that has a
high interest rate and is very long (five or more years of payments).
All of this has heated the auto industry like nobody's business.
Americans are shopping for new cars in the age of climate change.
But why are creditors so eager to loan expensive money to
poor people? Because they want to transform their payments into
securities, which are then sold to investors who are forever looking for
assets with high yields.
Bloomberg:
Even with the built-in protections, some market participants are starting to caution that buyers may be letting down their guard for the sake of higher yields.All of this sounds so familiar. Just as the American economist Hyman Minsky would have predicted, we have left the moment of caution and entered the speculative stage. Next will be the Fonzie period.
The problem with all of this can be explained by what the classical thinkers of political economy
(Adam Smith, David Ricardo, Karl Marx) distinguished as exchange value
and use value. With an automobile, the exchange value declines as the
cost of the use value increases. And so, in the future, many poor
Americans will be stuck paying high-interest loans for cars that have
little value and mounting expenses. This will, of course, lead to an
increase in delinquencies (which at present make up only 3 percent of
auto debts), and this will, of course, lead to the market being flooded
with auto-related securities everyone wants to sell but no one wants to
buy, and this will lead to a crisis in the financial markets.
You can expect all of this to happen in about four years. We will
also see a lot of worthless cars being abandoned, a leap in the number
of poor people who have no cars, and a public transportation system that
was severely stunted during the car bonanza. Meanwhile, the vampirish
financial sector will search for another hardened vein of the American
dream to suck.
