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Cash for clunkers’ has created an auto-bubble

Posted on Nov 17, 2009 in Opinion

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I would like to make a prediction.

The government has inadvertently created an “automobile bubble,” not unlike our housing bubble everyone is so excited about, which will come to fruition sometime between mid-2010 and 2011.

It won’t be near as big as the housing bubble, so you may not hear about it on the national news, but I’m sure it will happen. Check it out:
What was the primary cause of the housing bubble that left many houses foreclosed and families homeless?

“Greed!” cry the angry masses. “Capitalism has failed! The gluttonous lenders are to blame!”

Whoa, calm down. This is evidence that people will choose a flawed explanation to no explanation at all. I think it’s safe to say that lenders were greedy before all of this came about, wouldn’t you agree? It’s not as if this changed in the mid- to late ’90s. Greed is a constant factor that has always been balanced out by risk.

My girlfriend and I bought a house together about a year and a half ago. It’s got three bedrooms, two baths, and way more than we could actually afford or would have been approved for otherwise.

You see, we got in just under the cutoff of a Federal Housing Administration program that has been in effect since the mid-’90s. This program allows high-risk, low-income individuals, such as myself (20 years old and with $150 in my bank account), to be approved to buy a nice house with a down payment of $100.

The payments on this house were more than half of my monthly income. At closing, the loan officer expressed his discomfort at the situation, but told me that they were bound by federal policy. At the time, 25 percent of their loans had to be given to people that could not necessarily afford them. We have to keep a renter in one of our bedrooms just so we can pay the bills.

You should be asking why on earth the government would mandate such a horrendous activity, forcing banks to give out subprime loans. This was thought up during the beginning Bush years and continued up until two months before George W. left office.

The idea was that we could create an “ownership society” where people own their own houses instead of renting — what they were actually after was increased housing statistics to put into their memoires. What they actually got was two decades of people being approved for mortgages and building houses they could not afford.

Due to adjustable-rate mortgages and widespread defaults on home loans, the market eventually collapsed and all bank assets remain tied up in real estate that is worth half of what it was five years ago.

I spend a lot of time in and around Bessemer. The community is primarily made up of middle to lower class workers and their families. The Cash for Clunkers incentive program had a very similar effect on the locals that the housing program did. I noticed a sharp increase in the amount of shiny new cars in an area that has always been dominated by “clunkers,” as it were.

This seems like a good thing; the government subsidizes car sales to allow people to buy cars they would not normally be able to afford. The problem is that the majority of these people have never had a new car before, they’ve never made monthly car payments, and the insurance spike is surely substantial.

I believe that within the next several months to a couple of years we will see a huge number of defaulted car loans, repossessions, and people without a way to work; after all, they traded that old Chevrolet that got them back and forth to work every day and it was destroyed along with almost 700,000 others. How will the working poor get to work?
I could be wrong, but I think the government’s over-indulgent hand will end up screwing the populous once again. Mark my words.

Email: ianhoppe@uab.edu

 




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