Lots of poor Americans are buying cars with expensive credit.
Lots of poor Americans are buying cars with expensive credit. carroteater/shutterstock.com

The Wall Street Journal reports that during the second and third quarter of this year, more than $110 billion worth of auto loans were made to people with poor credit (below 660 score), and that nearly 70 percent of those loans were made to borrowers with credit scores below 620. Some analysts are correct to see similarities between the current boom in subprime auto loans with “what happened in mortgage-backed securities in the run-up to the crisis [of 2008].”

The way the new subprime business works is explained very clearly in a post on Bloomberg, "Longer Leash for Subprime Car Buyers in U.S. Stokes Debt Concern." It points out that one-third of the 14,628 loans recently bought by American Credit Acceptance (a company that buys and sells debt) were tied to borrowers with credit ratings below 500. It also explains that a borrower with bad credit does not get a sweet deal but a loan that has a high interest rate and is very long (five or more years of payments). All of this has heated the auto industry like nobody's business. Americans are shopping for new cars in the age of climate change.

But why are creditors so eager to loan expensive money to poor people? Because they want to transform their payments into securities, which are then sold to investors who are forever looking for assets with high yields.

Bloomberg:

Even with the built-in protections, some market participants are starting to caution that buyers may be letting down their guard for the sake of higher yields.
All of this sounds so familiar. Just as the American economist Hyman Minksky would have predicted, we have left the moment of caution and entered the speculative stage. Next will be the Ponzi period.

The problem with all of this can be explained by what the classical thinkers of political economy (Adam Smith, David Ricardo, Karl Marx) distinguished as exchange value and use value. With an automobile, the exchange value declines as the cost of the use value increases. And so, in the future, many poor Americans will be stuck paying high-interest loans for cars that have little value and mounting expenses. This will, of course, lead to an increase in delinquencies (which at present make up only 3 percent of auto debts), and this will, of course, lead to the market being flooded with auto-related securities everyone wants to sell but no one wants to buy, and this will lead to a crisis in the financial markets.

You can expect all of this to happen in about four years. We will also see a lot of worthless cars being abandoned, a leap in the number of poor people who have no cars, and a public transportation system that was severely stunted during the car bonanza. Meanwhile, the vampirish financial sector will search for another hardened vein of the American dream to suck.