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A new credit bubble gets ready to burst

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Re: A new credit bubble gets ready to burst

#71

Post by dsfyu404ed »

smt88 wrote: post #65
dsfyu404ed wrote: post #55

Earlier quoted context omitted.

There's been a lot of apprehension around auto lending for a long time. I'm not sure what a crash would look like though.

Very different from a housing crash in important ways, that's for sure. Vehicles are much more "liquid" -- they're portable and fungible to some extent. A bank repossessing many vehicles will get much more of its money back than a bank trying to sell foreclosed houses.

While I would totally love to see a used vehicle price crash because it would be good for me personally and to stick it to the "hurr durr, muh resale value" types, I'm not convinced that wouldn't have reverberations throughout the market.

Re: A new credit bubble gets ready to burst

#72

Post by smt88 »

dsfyu404ed wrote: post #71
smt88 wrote: post #65

Earlier quoted context omitted.

Very different from a housing crash in important ways, that's for sure. Vehicles are much more "liquid" -- they're portable and fungible to some extent. A bank repossessing many vehicles will get much more of its money back than a bank trying to sell foreclosed houses.

While I would totally love to see a used vehicle price crash because it would be good for me personally and to stick it to the "hurr durr, muh resale value" types, I'm not convinced that wouldn't have reverberations throughout the market.

I agree it would reverberate. I just don't know if it would be the first domino to fall in a massive economic crisis, the way housing was.

Re: A new credit bubble gets ready to burst

#74

Post by gizmo686 »

smt88 wrote: post #65
dsfyu404ed wrote: post #55

Earlier quoted context omitted.

There's been a lot of apprehension around auto lending for a long time. I'm not sure what a crash would look like though.

Very different from a housing crash in important ways, that's for sure. Vehicles are much more "liquid" -- they're portable and fungible to some extent. A bank repossessing many vehicles will get much more of its money back than a bank trying to sell foreclosed houses.

Vehicles also lose much more of their value than houses. The second you drive a new car out of the dealership, you are underwater unless you made a good downpayment; and it is not uncommon for people financing cars to find themselves underwater on their current one if they want to upgrade (or sell/downgrade to get out of debt). And that is in a good market. If there is a surge in used car supplies, we will see them depreciate even more.

In contrast, in a typical market, it is uncommon for houses to be underwater, as they tend to appreciate in value. It took a crisis in the housing market for a large portion to go underwater. A simmilar crisis in a market where underwater is the norm would just push them further under.

Re: A new credit bubble gets ready to burst

#75

Post by gizmo686 »

mikeash wrote: post #39
lordnacho wrote: post #21

Earlier quoted context omitted.

> A deposit just shows you can be sensible with money, and therefore the loan is much lower risk for the bank. Is is lower risk, but it's not because it's some weird moral test. The reason is that the lender only loses money once the value of the house has declined by the amount of the deposit. Say you buy a house with 20% down. If you sell the house at 80% of the value, you've wiped out your deposit but the bank los…

Credit ratings are an attempt to turn weird moral tests into a concrete number, and they have a massive effect on one’s ability to get a mortgage. It wouldn’t be at all surprising for a bank to try to account for factors the credit score misses.

What "moral tests" do credit scores use? You could certainly argue that they are not an accurate reflection of credit worthiness.

Re: A new credit bubble gets ready to burst

#76

Post by hn_throwaway_99 »

SilasX wrote: post #35
hn_throwaway_99 wrote: post #18

Earlier quoted context omitted.

My argument is that zero-percent down loans will always end badly, because if you don't have the discipline to pull together even a measly 5%, you don't have the discipline required for home-ownership. And it's not like banks can charge payday-loan like rates on a mortgage, because if you can't afford a small down payment you also can't afford high monthly rates. These types of loans always increase when credit is ch…

Those are good points (and I said something similar in my cousin comment), but you're overstating it by saying they always end badly. Obviously, some percentage of such mortgages are paid back. (I'd agree if you meant they go bad at the macroeconomic level , but you specifically clarified that you were referring to the individual who can't make a down payment and saying they will also fail to pay it back.)

Yes, you are correct, I'm not arguing every single mortgage will end in default, but that every macro environment where zero down mortgages proliferate will always end in tears to whoever is left holding the bag (currently homeowners and investors, and, crucially, rarely loan originators).

Of course, to my knowledge, the only environment where zero down mortgages were really widespread was the mid-aughts housing bubble, but even with an n of 1 I still think it's a bad omen.

Re: A new credit bubble gets ready to burst

#78

Post by wavefunction »

all2 wrote: post #45
not_a_moth wrote: post #11

Really seems like Wall Street is in love with the term "shadow banking", because it implies "can't regulate it". Yet we know exactly who the participants are, the types of firms, and their practices. Step 1 to better regulation of creative rent seeking is to stop treating it like it's nebulous.

I've seen the term "rent seeking" used a few times here on HN, and I have no idea what it means. For those curious: Rent-seeking happens when a person or business uses their position or resources to get some additional benefit from the government. The most common occurrence is when a company or industry lobbies the government to receive special subsidies, grants, and tariff protection. The term "rent" in economics me…

That's a very government centric definition but I prefer:

>Rent-seeking is an attempt to obtain economic rent (i.e., the portion of income paid to a factor of production in excess of what is needed to keep it employed in its current use) by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth.

The important bit in rent-seeking is "rather than creating new wealth."

Re: A new credit bubble gets ready to burst

#79

Post by nqzero »

Despegar wrote: post #43
jasode wrote: post #33

Earlier quoted context omitted.

>Really seems like Wall Street is in love with the term "shadow banking", Actually, the hedge fund and private equity fund people hate that term because it implies something nefarious is happening. In reality, the new post-2008 crisis bank regulations in both Europe and USA to ensure stability causes a new phenomenon to emerge: Non-banks lending money to companies that banks are not allowed to lend to. Every economis…

The shadow banking is fine. The taxpayer isn't responsible if a PE fund engaged in direct lending to the middle market loses all their money. But shadow banking can and should be scrutinized, and potentially regulated, if there are systemic risks that will lead to the taxpayer being on the hook once again. If it's just isolated private actors losing money it doesn't matter.

the article claims that the banks (the same ones that were bailed out in 2008) are the source of the capital that the shadow banks lending to companies

so the taxpayer is on the line (at least, as much as they were in 2008)

Re: A new credit bubble gets ready to burst

#80

Post by StevePerkins »

chiph wrote: post #29

> And household debt has grown no faster than household income and is concentrated in households best able to pay it back. I'm not so sure about this - what I'm thinking is that the next (current?) bubble is in auto lending. I'm seeing tons of advertisements saying "We will lend up to 72 months with very little down". With the average new car priced around $37500 that's a payment in the mid $500's for someone with go…

> With the average new car priced around $37500

That's absolutely jaw-dropping. I assumed that was a made-up Internet stat, and was going to ask for a cite, but some quick web searching confirms it.

I'm a used car guy, typically buying vehicles 2-3 years old, and would never contemplate paying above $20k. Even a brand new sedan (e.g. Nissan Altima, Honda Accord) is around $23k MSRP. A crossover family vehicle (e.g. Nissan Rogue, Honda CR-V) is around $25k.

What on earth are people purchasing, that the AVERAGE price is a low-to-mid range Mercedes?

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