The Subprime Auto Loan Bubble

A New York Times investigation has revealed another bubble, in this case, subprime loans on used cars. Of course this is not a surprise given the Federal Reserves ultra loose monetary policy and near zero percent interest rates that has forced banks, insurance companies, and just about everyone else to scamper to earn some return on their capital.

Auto loans to people with tarnished credit have risen more than 130 percent in the five years since the immediate aftermath of the financial crisis, with roughly one in four new auto loans last year going to borrowers considered subprime — people with credit scores at or below 640.

The explosive growth is being driven by some of the same dynamics that were at work in subprime mortgages. A wave of money is pouring into subprime autos, as the high rates and steady profits of the loans attract investors. Just as Wall Street stoked the boom in mortgages, some of the nation’s biggest banks and private equity firms are feeding the growth in subprime auto loans by investing in lenders and making money available for loans.

And, like subprime mortgages before the financial crisis, many subprime auto loans are bundled into complex bonds and sold as securities by banks to insurance companies, mutual funds and public pension funds — a process that creates ever-greater demand for loans.

Just another example of the surreptitious damage the Federal Reserve is inflicting on the economy in order to help the Big Banks.

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