Originally published at: https://boingboing.net/2018/04/09/self-driving-off-a-cliff.html
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Well it’s not like this ever happened before.
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Neal Stephenson said in “Snow Crash” that there are only four things the America does better than anyone else: music, movies, microcode (software), and high-speed pizza delivery. I would add a fifth one: finding smiley-faced ways to separate desperate people from what little cash they have remaining that also pose grave risks to the larger economy.
Also, vulture capitalists investing in the sub-prime car lenders makes this a case of risky and ruinous loans all the way down.
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Optimists borrow money. But the real optimists are the ones that lend to them.
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My guess is that none of the folks that lend the money will be hurt by this. Most of them have probably already skimmed off their profits and this is just the husk. Even the backing banks have probably already milked their profits out and and a write down of the debt just means those profits are a tiny bit smaller, while also giving them an opportunity to squeeze more out of the working class.
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I don’t see a problem here really. They loans were high risk, high yield for a reason. This isn’t anything like the subprime housing disaster a few years ago because the quality of the debt isn’t being lied about.
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Bankruptcies have a ripple effect, though, and large-scale bankruptcies have really large ripples. All those lenders going under means all the people that they owe money to are going to get pennies on the dollar, if that.
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Except it is still being marketed in bundled securities like subprime housing debt was.
So the toxicity of the loans is well hidden and still marketed to new customers as decent investments for institutions.
https://www.bloomberg.com/news/articles/2017-04-27/wells-fargo-jpmorgan-wary-of-auto-loans-but-pack-them-in-bonds
Here is the disquieting part
"Demand for subprime auto securities has been strong as investors clamor for debt that offers higher yields than Treasuries. "
The ultra low interest rates we had for a couple of decades so far has made stupid risky investment more viable.
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Not by the rating agencies, perhaps, but it sounds from the article like there was a lot of fraud being perpetrated on investors in the companies or their securitised debt as a matter of practise in a rather large industry. When companies start hiding losses and write-offs that’s effectively lying about the quality of debt that’s their stock-in-trade.
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It’s not really just the low interest rates… If anything, the problem is that there is too much money seeking investment, and not enough investments to absorb them.
This is a natural result of an economy where too much money is concentrated in the hands of the investor class: without a broader spread of wealth, there’s just not going to be enough people making stuff that requires investment, or people willing/able to take on larger loans that the investors (at several steps’ removal) would be indirectly funding, and so on.
This demand/supply mismatch for investment vehicles then leads to investment banks / management firms desperate to meet their wealthy customers’ needs, and who therefore in desperation repackage stupid-risk investments as moderate- to high-but-not-insane-risk ones, and then everyone acts surprised when it blows up in their faces.
And, as a corollary, there are often bookkeeping tricks that end up dumping a disproportionate share of the losses onto institutional investors (e.g. pension funds, endowments) that are more casually managed (and less likely to sue their agents because it’s not really “their money”), screwing over the middle class yet again, and further chewing away at their/our existence.
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Remember when you could put your money in a savings account and earn a modest 5-8% per year without risking the principle? Now the best CD rates get maybe 2.5% - and that’s with locking your money away for a minimum of 5 years.
Big banks are not really interested in providing their most basic services anymore - taking in deposits and loaning it back out to entrepreneurs needing capital to grow their businesses.
The entire financial system has turned away from traditional investment strategies to pure speculative gambling. Quelle surpise that these so-called “investments” have a nasty trait of blowing up spectacularly.
Every so often I re-listen to the Giant Pool of Money podcast. Remarkable how little has changed since then.
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To be fair, those were also the days when you paid 8-10% for a mortgage.
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Well, yes and no. Partially true in that all the “new hotness” you hear about in the investment world is either some new stupid internet IPO that immediately gets overvalued past the moons of Saturn, or some cockamamie scheme like the one in the article.
But again, this is because that’s basically all that’s left; nobody wants to admit it, but there’s just not much out there for the investor that doesn’t have an inside track of some kind and can get in on the first couple rounds of funding something actually new and sexy and innovative, because all that juicy investment is already getting eaten up by uber-wealthy and -connected people. The rest is just the crumbs.
In a way, it’s fascinating to see how the divide is growing even between the “regular wealthy” and the “super wealthy”, the billionaires and then the virtually poor wealthy that only have a few tens of millions to their name. I’m going to go out on a limb and say that these “only barely above rich” are going to be the new middle class in America in a few more years, getting picked and pecked to death by the very wealthy, and of course the current middle and “regular rich” (with only a few paltry millions tucked away for a rainy day) quickly becoming the poor.
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I don’t think of the ones doing the lending as optimists. More like predators.
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This is true. Then again, super low adjustable mortgage rates was one of the factors that enabled the sub-prime housing crisis by allowing people to qualify for more house than they could afford. There has to be a happy medium in there somewhere.
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They think that they’re going to get paid back with usurious interest. Which the post here shows is not always the case.
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That was actually a good thing if you want to buy a home.
The rest of this post is a lecture, so don't read it if you don't want a lecture.
The price of your home is set by the amount that someone else can afford to pay for it.
Let’s imagine you and another person want to buy a house. The other person figures out they can pay $1000 a month for a mortgage. The banks is offering them a 25-year mortgage at 3%. That means they can offer $218,483 for the house.
So you are going to have to figure out how to offer more than $218,483 for that house if you want to buy it. You either have to set aside more than $1000 a month or get a better interest rate or a longer amortization period.
What if the bank was offering them 12% interest? That doesn’t change that they can pay $1000 a month for a mortgage. So it means they can only afford to offer $99,186 for the house. Which means you need to offer ore than $99,186. Again, you need to either set aside more than $1000 a month or you need to get a better interest rate or a longer amortization.
Other things being equal, the interest rate doesn’t change what house you can afford. If you have the same competitors vying for the house then you have the same outcome. [Of course it might seem like you are more likely to lose the home to someone with a lot of cash on hand, I’ll talk about this later]
So what does it change? It changes your ability to pay down your mortgage. With a higher interest rate more of your payment goes to interest and less to principle. That means that increasing your payment is relatively more effective at reducing the principle owing. If you are able to overpay your mortgage payment by 10% then at a 12% interest rate you’ll have paid off your whole mortgage in less than 15 years (instead of the 25 year amortization period). If the interest rate is 3% it will still take more than 20 years to pay off the mortgage.
If you could increase your payment by 25% then with 12% interest you’d pay off your mortgage in 9 years vs. 15 years it would take to pay it off with 3% interest.
Also it takes far less time to save for a down payment with higher interest rates. Assuming you can set aside around 15% of your planned mortgage payment (while you pay the other 85% to rent) while you are saving, you need a 5% down payment to put in your bid, and the bank is willing to pay about 2 points less than what it is will to loan at (this is very generous) you end up needing to save for just over 2 years to get a down payment at 12% rates while you need to save for over 5 to get a down payment at 3% rates (since you basically earn no interest and the principle is so much higher).
Because you are paying down the principle slower lower interest also negatively affects your ability to upgrade your home in the future.
If all of this sounds kooky, it’s only because people keep saying that low interest rates mean a good time to buy. If all other things remain constant then of course you want lower interest rates on your loan. If the bank is offering 3% and you can haggle them down to 2.7% then that’s good for you.
But that’s only true if all other things remain equal. The idea that lower interest rates won’t affect house prices is 100% nonsense. When you realize that they will affect house prices, and that the math on how they will affect them is super straight forward (because you can calculate the value someone can pay for a home based on how much they are able to pay per month) it’s very obvious that higher mortgage rates mean more affordable homes.
And history backs that up. What has happened since interest rates bottomed out? We’ve seen a complete collapse in affordability in cities. Saving for a down payment has become nearly impossible so the proportion of people who need to have wealthy families they can borrow from in order to ever own a house has gone up. My parents owned their home outright less than 15 years after getting a mortgage. Many people during the sub-prime crisis were signing mortgages with 40 year amortization periods and while they may not have been paying a high interest rate, the rules that allowed them to get that loan meant that they were probably going to end up paying more total interest than if interest rates had been much higher. Their neighbours down the street could also get a massive quantity of cheap money to spend on a house, and that’s who they had to outbid.
I also turn to reality to answer the challenge that lower house prices mean you might have to compete against people with lots of cash on hand (which, of course, is facilitated by high interest rates). In reality it’s worked the other way. Part of what has driven housing prices so high is speculation. But why are people speculating by purchasing empty homes in the suburbs? It’s because interest rates are so low that they can’t easily find a better investment. The idea that homes are a good investment is very much a myth. If you adjust home prices today to what they would be if the same people were buying them at a 12% interest rate and compare them to the 1960s, they’ve only gone up about 1% in value per year, and they probably cost almost that much in repairs.
Lower interest rates lock in the power of people who already have assets to the detriment of people who don’t already have assets. Analysis to the contrary depends on how easy it is to get money with low interest rates without considering what effects cheap money has on the economy. I think the great lowering of interest rates was the baby boomers’ “fuck you, we got ours” to future generations. Increasingly the only way to own a home is to wait for your grandparents to die.
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That’s why you should borrow money from a pessimist, as they don’t expect to be paid back.
I like to think I’m an optimist, but I don’t know how long that’s going to last.
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Investors: “We want something that pays better than standard investments!”
Financial organizations: (rummaging about and bundling a bunch of subprime loans, junk bonds, and other risky investments) “Here ya go – pigeon!!”
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Yeah they really try to make it seem easy as pie to get a car that’s so high priced at those dealerships these days. I went in with one car in mind which I knew I could afford even with some minor crises happening in my life. They tried to up sell me to another car (it was nice but wasn’t in my budget or plans) which I just immediately shot down. I must be the most evil of car customer who sticks to my plans and never gets wowed by the shinier/newer vehicles. I just need something with low mileage (not new) and nothing horribly broken on it. The rest is just fluff.
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