An Auto Loan Debt Crisis Looks Imminent
An Auto Loan Debt Crisis Looks Imminent
Car loan debt has ballooned, delinquencies are still rising, and major lenders are leaving the market. Is an auto loan debt crisis coming soon?
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So basically,
- Banks will repossess vehicles to try and minimise losses
- Banks will not be able to sell those repossessed vehicles, resulting in losses
- Banks may become insolvent as they are unable to liquidate the vehicles
- Government steps in to bail them out
New vehicle prices are not in line with their actual value, so banks are making loans that aren’t covered by the collateral. This is shit management by the banking industry. If it’s impossible to get an auto loan then vehicle prices will eventually fall as supply stacks up. Banks are feeding this cycle by being unrealistic in these loan assessments.
But... But price only go up?
The sky daddy book of economics says price only ever goes up and concentrated wealth is a good thingThis is what my partner and I call a "state's right to what" problem. The centralized wealth says that centralizing wealth is good. Centralizing wealth is good for whom, Mr. Finance?
- Government steps in to bail them out *with tax money taken from the people who couldn't pay their car note in the first place
So either banks make money or banks take money.
The people who couldn't pay their car note in the first place usually ain't the type making a shit ton of money. They probably pay little taxes if any.
So taking responsible people's money then.
Well, yes and no. It’s grey like most things in life.
Banks and credit are a means to “grow the pie” by allowing us to factor in future value. Before banks and credit, the world was a zero sum game where one person only had because the other person had not.
They do serve a real purpose but are only valuable when properly managed.
Yeah that isn't true. The world never ran on the mathusian nightmare. If it had everything would be gone by now. You see wild edible plants and wild edible animals. Also census numbers and tax revenues would have been stable. The people of the past had the same issues we had. They starved on fertile farm land, they had economic downturns, they had baby booms, farms would switch from high end cash products to cheap grains they could sustain themselves with and back again.
Banks aren't doing us some favor by being the engine of economic growth. Every bank you see has become a corny capitalism abomination that makes most of its money lending money to people who don't need it, government infusions, and fees. Even the things that you can point to like financing a home ignore that it is a disease that they helped cause and they are selling the cure to.
4 probably won't happen. The mortgage bailouts were a bit of a special case, because the debt was rolled into securities and spread all over the place. To my knowledge there isn't a secondary market for auto loans, so the scope is limited to individual banks.
What may happen is the FDIC guarantees all deposits like they did with silicon valley bank, which is less bad than a full on bailout.
Why wouldn't they? You said it yourself, they will get bailed out. This is classic moral hazard. Once you remove risk of lose people will make decisions that are reckless.
Exactly. Consequences are necessary to curb reckless behaviour. That’s why the leaders of these entities should be punished separately.
They won't have to worry about selling the cars, some used car dealer will take them off their hands gladly. What the banks and the financiers will have to worry about is how to bundle all of that bad debt into CDOs. There's a movie about this I think.
No used car dealership is going to take a 2007 Chevy Cavalier for 35k and yet that loan was approved during COVID, and subsequently repo'd.
No dealer will ever unload that car without a huge loss.
It's the banks problem to sort out. Until they sell the car to a dealer - they don't lose much. It's all 'in the air' on the books. They have a 35k loan and (in theory) a 35k car.
I cant imagine any reputable bank gave out a $35k loan on a $1200 car. That sounds like something a "buy here pay here" lot might so and they'll just repo the car then resell it again.
Don't forget people also not being able to go to work anymore potentially