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Is the Fed Creating an Auto Subprime Loan Bubble?

Interest-Rates / US Debt Apr 04, 2013 - 12:43 PM GMT

By: Submissions

Interest-Rates

Terry Allen writes: Loans to subprime automobile borrowers are presently surging as a direct result of the current aggressive stimulus policies imposed by the US Federal Reserve. For example, deals instigated by car dealers soared by over 18% during 2012 involving over 6.5 million high risk borrowers. Reviews of court files by prominent market analysts have disclosed that auto subprime lenders are now one of the main reasons why so many Americans are forced to file for bankruptcy.


         Many revered economists are directly blaming the Fed for creating this alarming position arising from its persistent attempts to stimulate the US economy and labor market. The central bank has been constantly flooding the markets with massive amounts of freshly printed US dollars by purchasing toxic mortgage securities using its quantitative easing programs termed QE1, QE2 and QE3. The Fed has also adopted a zero interest rate policy for the foreseeable future.

         Other global central banks have followed the lead of the Fed by operating their currency presses at feverish paces. As such, they have all been generating new money out of fresh air. What are the primary reasons behind these dubious practices? Basically, as many of these applicable countries possess highly indebted economies, they are attempting to reflate their way out of deep recessions and ongoing crises that were formulated during the 2008 financial collapse. In fact, this recent disaster was really the end-product of ten years of easy monetary strategies implemented by governments and central banks across the globe.

         So, how have these actions lead to the potential creation of a new bubble within the automobile sub-prime lending industry? This is because the Fed has inadvertently fueled riskier and more speculative sectors of the economy via its quantitative easing programs. Major financial institutions have been forced to seek new products producing higher returns as their traditional investments sources have been hammered by the Fed’s zero interest rate policies. Subsequently, these organizations have flocked to support higher-yielding assets, such as auto subprime loans.

The growth surge in this business has been remarkable. Over $18 billion assets secured by automobile subprime loans were sold during 2012 compared to almost $11.8 billion in 2011. This acceleration remained unabated during the first quarter of 2013 as almost $6 billion further loans were activated compared to just over $4 billion for the identical period of 2012.

What is now concerning many analysts is that the borrowers of these subprime loans are being forced to service annual interest rates exceeding 20%. The lenders of these financial instruments are also operating on the basis that they expect one in four borrowers to default. Consequently, many experts are now issuing warnings such as ‘Here we go again. Another 2007 bubble is in the making.

Critics of the US Federal Reserve Fed are also expressing concerns that its stimulus policies are generating a number of other potential bubbles, similar to the automobile subprime one. In fact, the viewpoint of Richard Fisher, a non-voting Fed member, is acquiring ever-increasing credence. He has always been opposed to the central bank’s policy to continuously print copious amounts of US dollars by advising that by doing so America would be drifting deeper into unknown waters.

         Although a bust in the automobile subprime industry would not be as disastrous as that of the 2008 housing bubble, nevertheless the impact on an already shaky US economic recovery should not be understated. Despite this problem festering in the background, the Fed is unlike to alter its course and policies in the imminent future as it will continue to focus on efforts capable of boosting the US labor market and economy.

         For example, Ben Bernanke, Fed Chairman, explicitly stated at a recent congressional hearing that the central bank’s policies had helped fuel a recovery in the automobile and banking sectors. These statements are validated by figures demonstrating that US vehicle sales have now recovered to their pre-2007 levels. However, despite this encouraging data many analysts are worried that a one-in-four default rate is simply not sustainable. Subsequently, they are advising that all investors in the automobile industry should monitor this situation very closely.

This article was provided to MarketOracle.co.uk by Terry Allen, who writes for BinaryOptions.com.

© 2013 Copyright Terry Allen - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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