Analysts, including my colleague Jeff L. Yastine, are noticing a problem in the auto loan market. Many are calling it the next subprime crisis. They seem to be too polite to point out the cause of the problem, but I will assign blame to the responsible. As the chart shows, the federal government caused this problem.
(Source: Manheim Consulting)
Used-car prices are sensitive to economic changes, and from 1995 to 2009 they moved within a narrow range. But then…
“Cash for clunkers,” or more formally the Car Allowance Rebate System, was launched. Under this program, the government spent $2.9 billion in 2009 to permanently remove 690,000 cars from the used-car market. The intent was to improve the quality of the air; the result on used-car prices can be seen in the chart above.
The cash-for-clunkers plan led to what appears to be a new range for used-car prices — at least 8% higher than they would have otherwise been. This made it more difficult for many consumers to obtain loans and led to an expanding subprime car loan market.
As we wait for Congress to act on a number of other issues, it’s important to realize that laws can have unintended consequences. The cash-for-clunkers program, for example, seemed like a good idea, but it pushed used-car prices to a permanently higher plateau. This would not have happened without a push from the government, the same kind of push that led to the subprime mortgage crisis and the impending student loan crisis.
As investors, we need to keep this in mind and react to what Congress does, hopefully with time-tested investing strategies.
Regards,
Michael Carr, CMT
