Tuesday, March 28, 2017

Edward Harrison — Subprime auto delinquency rate at highest level since financial crisis

Why it matters: The big three areas of credit expansion this cycle – energy, auto and student loans – are not of the magnitude of the housing sector in the last cycle. Not only is the mortgage sector bigger, it was international in scope, adding significantly to systemic risk by undermining the balance sheets of European banks as well as American ones.
Nevertheless, increased delinquencies in the auto sector will spell trouble given the high LTVs of loans and lower credit scores of borrowers. And I am troubled by the OCC’s depiction of the commercial real estate sector; we could see heavy loan losses there in the next downturn.
 On autos, High LTVs mean lower recovery values for a depreciating asset. And this will be compounded by falling prices given the glut of production, now buoyed by subprime auto financing. And this will have a negative impact on the auto sector and the US economy. The question on a pullback in auto loans is timing; it’s not if, it is when and how hard — and how much this will impact bank balance sheets and the economy.
Credit Writedowns
Subprime auto delinquency rate at highest level since financial crisis
Edward Harrison

31 comments:

Bob Roddis said...

Sounds just like an Austrian boom/bust cycle to me. Let's be vigilant about making sure we refuse to comprehend what that means. And, while refusing to understand it at all, let's mock the people who do.

Tom Hickey said...

Minsky credit cycle too.

Bob Roddis said...

Except Minsky avoids mentioning the cause of the entire mess, that the cycle is caused by artificial credit expansion which draws investment into lines of production which are unsustainable without further injections and are not based upon true savings legally earned. He calls the unconstitutional kleptocratic fiat system "capitalism". It amounts to fake news and silent fraud.

Tom Hickey said...

Minsky's view is different wrt to causal factors.

The views are based on different assumptions.

As far as I can see, neither set of assumption is testable.

Economics is philosophy or religion

The argument is driven back to foundations for which there are no agreed upon criteria for deciding among.

Where criteria are adduced, true-false is conflated with good-bad, which is typical of ideology.

Matt Franko said...

Auto prices seem to be solid... guy just priced an F-250 Super Duty for $72k...

Don't see much of a problem if prices aren't down...

Tom Hickey said...

It's the quality of credit and now rising delinquency rate, rather than the sales volume, which has been good.

Fundamentally, it's a worker income issue.

Bob Roddis said...

"As far as I can see, neither set of assumption is testable."

I disagree. But for artificial credit emissions, there would be no inflation, right? Just permanent deflation. No one would have to purchase an inflation hedge and no one would have to buy a house as an inflation hedge. The source of funding for what used to be $4,000 truck which now costs $72,000 is artificial credit expansion not actual savings. We can argue about whether that is good or bad but it's not really debatable. In fact, the truth of what I just wrote is the basis of MMT, right?

I note that Steve Keen does the same thing, he pins the problem upon "private" debt. But that "private" debt is just funny money bank credit expansion while he always omits the Austrian analysis which predated his analysis by decades. And, he calls the present system "capitalism". Calling the present system "capitalism" while also calling a Ron Paulian hard money/no FRB system "capitalism" is absurd.

Matt Franko said...

Bob the vehicles are much more functional these days... apples to oranges...

Matt Franko said...

More bad news:

"US home price gains reached a 31-month high in January, according to the S&P/Case-Shiller U.S. National Home Price Index.
The index, which measures all nine U.S. census divisions, found that home prices rose 5.9 percent year-over-year in the month, up from December's 5.7 percent annual gain. "


https://www.google.com/amp/www.marketwatch.com/amp/story/guid/194541E4-13B1-11E7-BCC7-456FC1EDA05D


Tom Hickey said...

Bob the vehicles are much more functional these days... apples to oranges...

According to what I read, the major innovation recently has been design not improved functionality. The so-called functionality has been digital accouterments.

The basic automobile was designed 50 years ago. The principle addition after than was pollution control and improved mileage. Nothing since then, unless one adds hybrid and electric, which is just another from of pollution control and better mileage.

But the design and comfort have increased, as the expense of functionality, that is, being able to work on our own vehicle.

Noah Way said...

Economics is philosophy or religion

Economics is ideology.

Another subprime has been pumped and will soon be dumped. Alignment with rising interest rates, peak housing and record high stocks looks like a perfect storm.

LK said...

"Bob Roddis@March 28, 2017 at 3:00 PM said...
Sounds just like an Austrian boom/bust cycle to me."


No, it isn't, idiot.

Once again Bob -- "I don't know Austrian economics if it bit me right in the ass" -- Roddis demonstrates he doesn't understand the economic theory he claims nobody else understands.

ABCT is about credit flows *to capitalists*, not consumers. ABCT says credit flows induced by FR banking supposedly distorts the structure of production.

ABCT is NOT a theory of business cycles induced by aggregate demand booms and busts by consumer credit, as the gist of post cited above.

Try again, Bob, you Austrian d*ckwad.

LK said...

Bob Roddis said...
But that "private" debt is just funny money bank credit expansion while he always omits the Austrian analysis which predated his analysis by decades.


Steve Keen omits the Austrian theory because he knows it is B.S. You'd know that if you had read pp. 445-449 of Debunking Economics where Keen reviews Austrian economics and shows its flaws and how it is based on the same marginalist sh*t that the whole 459 pages of Debunking Economics is devoted to refuting.

Bob Roddis said...

Wrong again, LK. I reformulated Austrian theory back in 1974 based upon its FUNDAMENTAL concepts of economic calculation and miscalculation. You know, those basic concepts you that cannot (or will not) grasp. Examining funny money fiat emissions, the underlying concepts can be applied to any line of investment or product line that depends upon new funny money loans, including consumer spending. It is still the case that this will mostly impact LONG TERM INVESTMENTS (more roundabout investments) but these emissions certainly can impact credit purchases of autos and homes.

The original formulation of the ABCT was based upon the former FRB gold or gold exchange standard, not the present day MMT funny money system we now know and love. Therefore, new money is now going to distort different areas of society than under the prior system. Joseph Salerno referred to this in 2014:

https://mises.org/library/reformulation-austrian-business-cycle-theory-light-financial-crisis-0

However, I do not require authorization from an "Austrian Master" such as Salerno to justify my application of the basic Austrian concepts (which you yourself do not and cannot understand) to new factual situations. Economic calculation and miscalculation are realities and fiat money is going to distort the investment, price and capital structure. Where this happens is a question of fact. That this might happen with auto loan credit as opposed to giant factories does not refute the underlying analysis. Your endless attempts to freeze the analysis in 1931 or to employ poorly constructed sentences from the "masters" as "the final word" just shows your desperation.

Tom Hickey said...

But for artificial credit emissions, there would be no inflation, right?

Not necessarily. Confusing a sufficient condition with a necessary one. There are many reasons for changes in the price level. For example, there have been inflations under coin-based currencies owing to clipping. The price level can also shift owing to supply, e.g., shortages of necessary resources like energy.

But the issue here is not inflation or even the business cycle. The financial cycle leading to the GFC occurred in a period of low inflation and the credit crisis developing in other subprime lending now is happening in a period of low inflation.

The Great Depression, which was also a financial crisis initially, began when the world was on a gold standard.

But we've debated all this previously IIRC.

intajake said...

" that the cycle is caused by artificial credit expansion which draws investment into lines of production which are unsustainable without further injections and are not based upon true savings legally earned."+Bob Roddis

could you expand on this,
what do you mean by legally earned.

and what is artificial about the credit expansion,banks under the gold standard would still create speculative bubbles

Bob Roddis said...

Mr. Keen: Thirdly, while it is in general an evolutionary approach to economics, at least one branch of Austrian economics, associated with Murray Rothbard, has a quite non-evolutionary attitude towards both the existence of the state and the role of money. The market economy may have evolved, but it seems the state was simply imposed from outside as an alien artifact upon our landscape. This is certainly one way to consider the growth of the welfare state; but an equally tenable argument is that the welfare state evolved as a response to THE FAILURES OF THE PURE MARKET SYSTEM during the Great Depression.

It is preposterous to describe the Great Depression as a “failure of the PURE MARKET SYSTEM". Fake news.

Mr. Keen: The post-Keynesian school, on the other hand, argues that though it may appear that the state controls the money supply, the complex chain of causation in the finance sector actually works backwards. Rather than the state directly controlling the money supply via its control over the issue of new currency and the extent to which it lets banks leverage their holdings of currency, private banks and other credit-generating institutions largely force the state’s hand. Thus the money supply is largely endogenously determined by the market economy, rather than imposed upon it exogenously by the state.

Calling the current special status of banks in creating new funny money loans “the market economy” is just more lies and fake news.

Tom Hickey said...

BTW, auto loans in the US are not generally bank-financed. They are financed by the manufacturers through their finance companies, which were design to capture the interest instead of gifting it to banks.

These were dodgy loans extended by the auto companies to increase their sales. It worked pretty well. Sales have been pretty good for them, and it's been mostly big ticket items — SUVs and pickups.

LK said...

" I reformulated Austrian theory back in 1974 based upon its FUNDAMENTAL concepts of economic calculation and miscalculation"

Hahahahaha! Stop the presses!

(1) When Bob Roddis says "Austrian theory", what he actually means is: some deranged gibberish he pulled out of his ass in 1974 -- or, more likely, 5 minutes before posting his comment.

Tell us, Bob, why have you never published this epoch-making new Austrian theory in any book or article in an Austrian economics journal??

(2) As for economic calculation, that is possible -- as Mises himself admits -- as long as the following is true:

(1) for the sake of “economic calculation all that is needed is to avoid great and abrupt fluctuations in the supply of money”; and

(2) slow changes in purchasing power of money (as in the 19th century and gold standard eras), so that the “entrepreneur’s economic calculation could disregard them without going too far afield.”

http://socialdemocracy21stcentury.blogspot.com/2013/05/misesian-economic-calculation-and.html

Fiat money can and has provided conditions that fulfil BOTH criteria, e.g., most of the post-1945 era. Large increases in the money supply *in the long run*, as in the 19th century under the gold standard -- do not prevent economic calculation.

But don't worry: obviously what Mises said is wrong, because our prize lunatic Bob Roddis is on the case and will "reformulate" Austrian theory.

LK said...

"Calling the current special status of banks in creating new funny money loans “the market economy” is just more lies and fake news."

Private sector agents have ALWAYS been able to endogenously expand the money supply over and above gold or metal: they do it by monetising debt, e.g., bills of exchange, negotiable promissory notes, negotiable cheques, and other private sector, monetised IOUs can expand the money supply. This Keen is correct, even before the existence of modern fiat money: the money supply has always been at least partly endogenous.

This is an inherent tendency of capitalism and monetised IOUs are neither fraudulent nor illegal.

So all Bob Roddis has proven is that he is a vicious anti-capitalist and collectivist piece of filth who would use violence and force to supress the natural behaviour of capitalists.

Bob Roddis said...

As always, LK, your subject-changing and off-point insults demonstrate your desperation.

But thanks for the heads-up on Keen's fake news analysis of the Austrian School, pp. 445-449. I didn't know the book was free online.

https://divulgacionmarxista.files.wordpress.com/2016/05/debunking-economics-steve-keen.pdf

lastgreek said...

... the credit crisis developing in other subprime lending ...

Tom, unless Americans are living in their autos, is it such a big worry? Moreover, the price of an average auto is around 5% of an average house, give or take a percentage. Auto subprime delinquency nowhere near approaches the financial crisis of 2008.

Tom Hickey said...

Auto sales are a significant contributor to GDP and if credit in the industry is peaking it will affect sales. Prices of used cars are already falling in the US. That will further depress the market for new vehicles. This looks to be a peak in real terms.

Matt Franko said...

Bob-o,

At the risk of piling on....

Here is Steve Bannon in the NYT today:

"And then the Republicans, it’s all this theoretical Cato Institute, Austrian economics, limited government — which just doesn’t have any depth to it. They’re not living in the real world.”

LOL! Now I know I couldn't have voted for a better crew!

Matt Franko said...

"further depress the market for new vehicles"

2016 just completed was all time high for cars and light truck sales.... all time high in leading flow too....

Tom Hickey said...

What I meant was that the fall in used car prices will encroach on new car sales if credit standards are tightened as delinquency rate rises. Looking like the market has peaked or is near it anyway.

Calgacus said...

Bob Roddis:

There isn't any other kind of credit but artificial credit. There isn't any other kind of money than funny, fiat money. Never was, never will be, never can be. Quantities of gold, if used as money (things) are funny money, fiat money. Their value is due to the fiat/credit acceptance, not vice versa. The reverse is impossible - if gold had such a value, say eating a gold coin would give you 20 years of life, people would use it for that purpose, not get rid it of in monetary transactions.

The MMT thinkers, studied, understand, have built on and improved on the real virtues of Austrian theory - which is not surprising, if you look at the lineages of who studied under who. But if Austrians don't study MMT, don't understand it - and a lot of MMT fans don't really, as it is deceptively simple, rather more subtle than it first appears - they can't really sensibly criticize it.

Bob Roddis said...

Calgacus:

1. Understand MMT completely and I have a certificate from Mr. Hickey to prove it.

http://tinyurl.com/muvb2vg

2. The only reason people “accept” funny money is because the government taxes the purchase of gold and silver and taxes any gain on gold and silver if used as money for an exchange. Don’t pay your taxes and you go to jail. Mosler admitted in his debate with Bob Murphy that the reason people use funny money is because the government has a gun to their head.

3. No MMTer understands basic Austrian concepts or analysis.

GLH said...

LK: " When Bob Roddis says "Austrian theory", what he actually means is: some deranged gibberish he pulled out of his ass in 1974 -- or, more likely, 5 minutes before posting his comment."
Sorry Bob, but that is just funny.

Penguin pop said...

Bob,

The fights between you and LK always made me laugh. You two have some interesting chemistry going on. I never see you on this blog as much as I did a few years ago when I was lurking. Just wanted to drop in with that.

GLH said...

"Don't see much of a problem if prices aren't down..." That is probably what a lot of people said about housing in 2007.