Not Again…

Somebody told me once, years ago, that the definition of insanity was doing the same thing over and over while expecting a different outcome. I’m not sure that’s true, but I’ll admit that I can’t think of any other explanation for a story I saw in the Los Angeles Times online about the so-called “Buy Here, Pay Here” auto sales companies. If you’ve never encountered one of these operations, they’re defined as used car dealers who require customers to finance the vehicles they purchase (no cash sales; they literally will not do business with you except on credit) and also require the purchaser to come to the dealership each month and make all payments in person. They’re notorious for offering people who couldn’t get credit any other way payment plans at interest rates two or three times higher than credit card interest – and repossessing the cars on the first missed payment…

If this is sounding familiar, it’s almost exactly the same business model that resulted in the housing collapse of the past few years. Mortgage offers of this type are generally referred to as Predatory Lending, and the principle is the same: sell people property they can’t afford on terms they can’t possible pay, then foreclose on them and sell the same property to the next sucker in line. In real estate many of the buyers rationalized these decisions as “investments,” believing that they could “flip” the houses and make money on the deals, and many of the lenders assumed that if the original buyer defaulted there would be dozens of other gullible, credulous or greedy customers who would purchase the foreclosed property and start the cycle over again. But as silly as this all looks in hindsight, what really took down the economy was the process called “securitization” of the mortgages…

When future historians look back on our time, I’m not sure how they will explain how otherwise sane people could have believed that speculation in packages of loans was a good idea in the first place. Granted that companies buy up loans all the time – it’s how you start out with a car loan from GMAC and wind up making your payments to Chase, the way I did – you’d still expect someone associated with the process to question if packages of mortgages that the borrowers couldn’t possibly pay off were really investment-grade securities before buying millions of them. The fact that loans secured by real estate have traditionally been relatively safe is no excuse; history tells us about any number of artificially-created bubbles like this one, and all of them have ended exactly this way. But while the securitization of these loans was idiotic, and the classification of them as anything other than junk securities was inexcusable, neither of them really compares to doing the same thing less than four years later with property that depreciates every mile you drive it…

I know it’s hard to believe, but as far as I can tell the Times story is correct; companies are actually bundling up dozens or hundreds of these crap-level car loans and trading in them as securities. I could understand trading shares in the used-car operations themselves; the companies may be scummy, but there’s no question they’re wildly profitable. And, as previously noted in this space, if Congress ever outlaws making money off the gullible, the economy will probably collapse. But these aren’t consumers or inexperienced newcomers; the companies involved are the same ones who caused the collapse of 2008 with exactly the same greed and stupidity. Except that, unlike a house (which may return to full price years or decades down the line) a car is going to end up in a junkyard in a few years – if the next buyer doesn’t just abscond with it and never pay off their loan…

So is it madness, or just short-sighted greed? I’m not sure how we could tell the difference at this point, but I worry about what will happen to our economy if we have a few more economic disasters like the last one. You think there’s unrest in the streets NOW – what do you think will happen if the bubble pops again?