After the 2008 financial crisis, some of us expected people would become somewhat allergic to easy money and credit. Unfortunately, a report from the New York Federal Reserve shows that as of 2019, consumers have yet to learn their lesson. After all, a record 7 million Americans are now behind on their auto-loan payments.
But as auto loans have surged by nearly 35 percent since 2008, one might wonder if the government has a hand in this new crisis.
As young people struggle with their student loans, postponing dreams of owning a house and starting a family as a result, there’s yet another type of debt that is forcing them to think twice before making long-term plans: auto loans.
According to the Fed’s report, 2018 had the highest number of new auto loans and leases appearing on credit card reports in the last 19 years, adding up to $584 billion. But the increase in auto-loan debt does not necessarily mean that people are actually keeping up with their payments, as the Fed also found that people under 30 are not performing as well as older people when it comes to paying their loans.
The Fed learned that young people started falling behind between 2014 and 2016. Now, millennials (those between the ages of 18 and 39) are trailing behind all other demographics, as they have the most abysmal delinquency rates according to the report.
By the end of 2018, there were “more than a million more troubled borrowers than there had been at the end of 2010,” the Fed explained. However, the report failed to identify the ongoing fiscal policy measures of easy credit, low interest rates, and non-stop balance sheet expansion at the core of this crisis. Instead, the Fed explained that it is a shame the “strong labor market” has not benefited all Americans.
Perhaps the real reason for this mess is that there’s more to this crisis than any institution is willing to admit.
Easy Credit Hurts Consumers
Unfortunately, the reality is that the Federal Reserve’s policy of easy money was never replaced. Instead, the country’s monetary policy remains expansionary, meaning that more money is being introduced into the market while interest rates remain abysmally low — notwithstanding President Donald Trump’s fear mongering regarding the Fed’s modest rate increase.
As the market was never allowed to heal from earlier malinvestments, consumers continue to believe the risks of borrowing are minimal — especially those in the lower income brackets.
With debt still lingering, consumers continue to apply for more loans and the malinvestment expands, covering yet another sector.
And thanks to the fact that America is plagued by widespread lack of financial literacy, this perfect storm leads to yet another major bubble: the auto-loan crisis.
After the 2008 crash, the government bailed out automakers and pushed programs such as Cash for Clunkers down consumers’ throats. But in an attempt to get the sector back in business, these efforts ended up hurting consumers as failed automakers were never allowed to go bankrupt, and competitors were never allowed to offer better products at cheaper prices thanks to government’s artificial boost.
With government-backed easy-credit programs and expansive monetary policy in place, consumers are more likely to ignore the high costs of vehicles because of the easy access to credit. Over time, delinquency grows, as consumers eventually realize they took a much larger bite than they could chew.
Despite this reality, the Fed is reluctant to change its course.
In a recent statement, the institution even promised to “ease” its already-loose monetary policies in case of a crisis. With a record number of Americans behind on their auto-loan payments, one may wonder whether the government will, once again, intervene to “save” the industry — creating more problems as a result.