Did People Really Not See the Auto Bubble?

Wednesday, March 16, 2016

The auto bubble and its potential for collapse is finally getting attention. To quote:

The rate of seriously delinquent subprime car loans soared above 5% in February, according to Fitch Ratings. That’s worse than during the Great Recession and the highest level since 1996.

It’s a surprising development given the relative health of the overall economy. Fitch blames it on a dramatic rise in loans with lax borrowing standards that have helped fuel the recent boom in auto sales. More Americans bought new cars last year than ever before and the amount of auto loans soared beyond $1 trillion.

But research conducted by a group that tracks people’s credit scores, TransUnion, suggests that plummeting oil prices is a factor in rising defaults because of the flurry of pink slips in the oil industry.

It is not “surprising” because the economy is not healthy – the government has managed the US economy into an unsustainable position of false prosperity built on a financial house of cards. And CNN has the gall to blame these auto loan delinquencies on job loss in the oil industry? The display of a graph that indicates high delinquent payments in states with employment in the oil industry is a tremendous fail. These are also the states that have been relying heavily on a bubble economy (financial, stock market, employment, etc.) brought about by the oil industry to drive false prosperity, and folks in those states are therefore much more indulgent of the ‘have-pulse-will-buy’ mentality on such items as houses and cars.

Fitch is only partially right in naming lax underwriting standards as the problem. Without willing buyers whose time preferences have been distorted by Keynesian monetary and fiscal policy and centrally-planned behavioral machinations, the ‘have-pulse-will-loan’ credit industry would lack the appropriate receivers of the government’s cheap and easy loans.

Remember Cash for Clunkers, the government fix to re-stimulate the auto industry? I covered it extensively. Look for something similar, again, as Detroit automakers begin to feel the squeeze. Follow me on Twitter @karendecoster.

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