Are You Ready for the Next Subprime Lending Crisis?

When the housing market was flying high and poor decisions were being made by major lenders as they wrestled for as much money as they could, warning voices were largely suppressed. People who expressed concern not just with blatantly illegal and exploitative lending practices, but with overall sloppy standards in the industry, potentially dangerous derivatives, and other issues in the market were pooh-poohed. Nothing could possibly happen to bring down the market, boosters assured themselves.

And yet, as we all know, the bubble popped, because that is what speculative bubbles do when they become too large to sustain. And, of course, as soon as one bubble pops, more start to appear like mushrooms on the landscape. Some fear the education loan bubble, which is already looming; with growing numbers of students in default on their loans, facing extremely high debt, that’s a legitimate concern. The government’s attempts to take action on education loans have been sluggish and incomplete, influenced by the huge education loan industry and its desire to squeeze every last drop of profit out of students and their families.

There’s another bubble that’s slowly starting to swell, though, and that’s auto loans. The auto industry has actually been doing pretty well in the United States, and one reason for that was the series of incentives used to jumpstart sales, but another reason for that is the rise of questionable lending practices. Not just on the level of exploitative lending, like the buy here, pay here dealerships profiled by the Los Angeles Times in its explosive investigative series, but good old fashioned car loans and leases.

I was struck by this firsthand when I leased a car in August and watched the process of the financials unfold. Desperate to land a sale, the salesman used every trick in the book with me, and I was astounded when he took my stated income at face value without any verification; I could have told him I earned pretty much anything and he’d have run with that to massage the numbers into getting me the deal I demanded. I was in a more powerful negotiating position because I have excellent credit and could effectively name my price or walk away from the deal, but his methods in terms of financial diligence were still astonishingly slipshod. Having good credit doesn’t mean you’re honest, or that you make as much as you claim to make. It may mean I’m less of a credit risk, but that doesn’t mean I can afford the car I’m leasing or buying.

Yet, I’m the least of your worries as a consumer who will be affected by the auto loan bubble whether or not you own a car, just as people were taken down by the housing bubble even when they didn’t own homes. The problem here is that more and more investors are putting their money not with people like me, who offer low risks and very low returns, but with people who have low credit scores and a seductively high potential for returns. A whole new generation of asset-backed securities is arising, and they’re being used just like mortgage-backed securities once were: to turn a quick profit for investors. That doesn’t translate to economic stability for the rest of us, though, because as their use spreads and the standards for car loans fall even more, we’ll be looking at an even bigger and potentially more explosive bubble.

The auto market plays a big role in the US economy, which is part of the reason the federal government was so eager to jumpstart it. Now we’re looking at a potentially dangerous situation that could pull the market and the rest of the economy down with it, and the writing is on the wall for anyone who cares to look at it.

Like the subprime housing crisis, the subprime auto industry highlights some uncomfortable truths about life in the United States. Most borrowers have poor credit, especially those seeking used cars (because people with higher credit scores tend to have correspondingly more money to spend and can afford to buy a new car). They need their cars for mobility, to get to work, to carry their families around, to perform other tasks of daily living, and they rely on credit to help them buy new or used vehicles. However, the provision of cheap credit carries a huge financial risk for the economy as a whole; as a utilitarian, I have to argue against the ready availability of cheap credit in the US because of the huge risks.

But as a humanitarian, I know it’s not that simple. Limiting access to credit forces people towards exploitative lending, which is even worse than subprime lending in terms of what it does to individuals and their families. And the need to rely on credit is a reflection of depressed wages, reduced working hours, and other employment issues in the United States. There was a time not that long ago when many people could buy homes and cars with large down payments or even outright with their wages, because they were making enough to do that. Now, it’s increasingly common to see miniscule or nonexistent down payments and high monthly payments as part of a cheap credit deal offered to a customer who isn’t making enough to survive because that customer is locked into an exploitative economic system that profits by not paying workers what they’re worth.

This crisis, as with the subprime housing crisis, is a reflection of the contempt the United States has for the working classes, and the limited understanding this country has of what it’s like to be poor and in desperate need of something that costs too much. In the end, we’re all going to end up paying for our nation’s greed.