Sunday , 24 September 2023

Subprime Chaos: The Auto-Loan Bubble Is Bursting & It’s Worse Than 2008

The auto market is showing signs of incredible worry. Delinquent subprime auto-loans are higher than they were in the last recession. What’s interesting – and worrisome – is that consumers are defaulting on subprime auto loans when the economy is supposedly doing ‘very well’.

The original article has been edited here for length (…) and clarity ([ ])

Look for yourself.

We must ask ourselves – “if things are going so well, why are subprime loan delinquencies at a 22-year high?”. Using the often-ignored Austrian Business Cycle Theory (ABCT) – coined by the little-known but brilliant economist Ludwig Von Mises – I am blaming the Fed for all this.

Thanks to the Fed, a near decade of zero-interest rate policies (ZIRP) and three rounds of Quantitative Easing (which totaled over $3.8 trillion in printed money) – the consumers’ became hooked on cheap auto loans.

Their policies made the entire system fragile by getting consumers addicted to cheap debt through their easy money and then they began tightening credit – crippling the borrowers. Think of it this way:

  • Imagine you’re addicted to alcohol and your bartender keeps giving you cheap drinks each night for months.
  • Eventually, from drinking way more than you should’ve been able to afford, you now have a very high tolerance.
  • Suddenly the bartender becomes strict and starts giving you less booze. He tells you, “sorry but no more free alcohol for you.” Problem is, you wouldn’t have drank so much [in the first place] if you had to pay full price for it.
  • Now you’re left with awful withdrawals – scrounging together all the extra money you can just to pay for a drink but the only way you can really afford to feel better is if he starts giving out free drinks again or you painfully detox.

Just look at the collapse in auto-loan growth since 2015 – when the Fed began tightening with their end of QE and talk of rate hikes. . .

Clearly the higher rates had an impact on new auto loans but a bigger – and more pressing – problem is that the Fed’s short-term interest rate hikes are making these current subprime auto loans unserviceable. The borrowers are having a harder time paying more interest for an asset that depreciates 15% the moment they drive their car off the lot. Clearly, affordability is becoming a problem.

…The Fed created a bubble in auto-loans by keeping rates low and printing trillions and now they’re going to blow the whole thing up with their rate hikes – just like taking the free drinks away. . .

I expect delinquent subprime loans to keep hitting new highs and I expect the ‘growth’ story the pundits keep pushing down our throats will fade because, even if the auto-loan industry and general economy hasn’t rolled over yet, each new Fed rate hike pushes us one step closer to the edge – 0.25% at a time…

History shows us that when things start their descent into collapse – the subprime market is the first to get hit. Food for thought.

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