More Americans fell behind on their car loan payments in the fourth quarter, bringing auto delinquencies to their highest since the height of the financial crisis, Federal Reserve Bank of New York data released on Thursday showed.
Car loans delinquent by 30 days or more grew to $23.27 billion, the most since $23.46 billion in the third quarter of 2008. They were up from $22.98 billion in the prior quarter.
The first and most obvious point to make is that that’s just not enough money to cause a crash. Lenders are distinctly better capitalised than they were and that’s just not the sort of sum that’s going to wipe anyone out. But there are people worrying about it all the same:
A huge increase in the amounts borrowed by already indebted households in Britain and the US to buy new vehicles is fuelling fears that “sub-prime cars” could ignite the next financial crash.
No, it’s simply not going to happen. To think that it will is just to be wrong about what caused the last crash. There is thispoint:
Let’s talk about what really matters. Following the Great Recession, subprime lending, not just in auto finance, nearly disappeared. Now, auto lending, like other consumer finance markets, has returned to “normal.” In other words, subprime lending, along with lending to all risk tiers, has grown over the last several years as consumers have returned to the auto market. With loan volume expanding, of course, there will be a rise in delinquent payments. It’s to be expected.
But much more important is to understand what did cause that last crash. No, it wasn’t mortgages, it wasn’t the housing market, it wasn’t falling house prices. It also wasn’t robosigning, syndicated bonds, slicing and dicing, mortgage backed securities nor even the greed of Wall Street. It’s entirely true that the housing market fell and people couldn’t pay their mortgages. But that still isn’t what caused the financial market crash.
The actual problem was who owned the bonds made up of the loans. It was the banks which did. And they financed them on hugely leveraged terms. Some of them up to 30 times leverage, they had $3 of capital for each $100 in loans. So, what happens when the loans fall 3%? That capital is wiped out and so the bank is scrambling to sell the bonds at near any price. Which depresses the prices of all such bonds which means another highly leveraged bank is going to have to scramble and so on. The problem was that leverage. If all the bonds had been owned by non-leveraged investors like individuals or pensions or insurance funds then we would still have had the housing market crash but no collapse of the financial system at all.
And believe me, there’re no banks out there holding those auto loans on highly leveraged terms. So the one essential perquisite to cause a crash like last time is missing–thus the crash like last time won’t happen.
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