Last Sunday, on HBO’s Last Week Tonight, John Oliver offered audiences quite the disparaging look at today’s auto lending industry. The late-night television host frighteningly likened today’s lending practices with the subprime mortgage crisis of 2008, ultimately raising the question of whether or not car loans will spark the next big financial meltdown.
While the simple answer to that question is an apparent “no,” there are at least a few convincing connections made by Oliver throughout the bit. For one, it’s entirely fair to say that many auto lenders today are targeting high-risk borrowers by forgoing credit checks, often leaving customers with piles of debt they can’t afford.
Interest rates on these subprime loans average at 19% and can run as high as 29%, leading to repossession after repossession after repossession. Further, subprime auto loans now account for ~25% of lending, marking a 10-year high. Simply put, these are bad deals that almost no one should be making, but people are — and that could mean a bubble.
That said, the situation today is nowhere near comparable to the subprime mortgage crisis and doesn’t deserve any major fear or outrage. As Forbes contributor Tim Worstall puts it, John Oliver’s take on subprime auto loans “simply doesn’t stand up.” In truth, Oliver takes a pretty egregious spin on auto lending, both economic and political. Pardon me while I express my gripe.
Personal Responsibility: Get Some
To start, the episode leads in with an Al Jazeera clip of a mother being interviewed about her daily commute to work. Stacey Calvin explains that to get to the day care center where she’s employed, she has to take a bus, then two trains, and then another bus. On an average day, it apparently takes her anywhere between 90 minutes and two hours to make the trip. If she had a car, Calvin claims, it would take her 10 minutes.
Coupled with a statistic showing that ~85% of Americans drive a car to get to work, the anecdotal story of Stacey Calvin is used to insinuate a lack of options for the poor (specifically in urban environments), and ultimately transfer moral responsibility of subprime loans to predatory lenders — but let’s take a step back for a moment.
First and foremost, no one is forcing Stacey, or anyone in her position, to buy a car or commit to public transport. A personal sedan is a consumer product and a convenience — not a natural right. Jointly, the free market provides a number of transportation options more affordable than a car.
Any trip that takes 10 minutes by car in any U.S. city simply does not require two hours of public transport or a sedan: a bike will get you there in 20, a scooter will get you there in 10, and an Uber will get you there for $7.00.
Now, I know I’m going to get plenty of flak for this one, but I have to say it: It’s fair to say that someone like Ms. Calvin might actually be better off biking to work, or perhaps forgoing a value meal a day to pay for an Uber, rather than relying on her city’s broken transportation system:
Before anyone gets too irate, let me just clarify that there’s nothing wrong with being overweight if that’s the lifestyle choice you decide. This is America and you can do whatever you want. What there is something wrong with, though, is painting a person like Stacey the victim of predatory auto lenders as if there’s no such thing as personal choice.
By removing personal responsibility from borrowers, people like Oliver only serve to patronize these people’s intelligence. It has nothing to do with greed or recklessness; they’re just too stupid to understand what they’re signing, right? This line of thinking is not only inherently bigoted, but it’s enabling as well. A far more effective solution is to educate borrowers on financial accountability, not to remove personal accountability and demonize the other end of the contract.
The Next Big Short?
As for economic scale and how this all relates to 2008, auto loans account for far too small a portion of total debt balance to hold a candle to the havoc caused by the subprime mortgage crisis. All told, the auto loan market is one-seventh the size of the mortgage market in 2007.
Further, while the percentage of subprime car loans may be at a 10-year high, the median credit score for U.S. auto loans has remained relatively stagnant since 2010 and remains ~30 points above levels seen in 2007. This contrasts starkly with the years leading up to the subprime mortgage crisis, where credit standards had deteriorated ~50 points.
Put simply, today’s auto loan environment isn’t exactly the dark cloud hanging over the American economy Oliver wants you to think it is. This isn’t going to be a sequel to The Big Short, or even a straight-to-DVD knock-off called The Medium Short — the writers at Last Week Tonight are apparently just low on material.
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The Real Auto Crisis That’s Brewing
While subprime auto loans won’t be what brings rise to next the next economic recession, though, there is a very real and looming threat to today’s auto industry that Oliver and many others are overlooking. It’s an event that has the potential to completely shock the American economy, not only by turning the auto industry on its head, but by deleting millions of jobs in the process.
If you’ve been reading these pages long enough, you probably know I’m referring to the emergence of driverless cars and autonomous vehicles (AVs). According to Barclays, AVs are expected to cut vehicle sales as much as 40% as robot drivers take over the road.
As Bloomberg Technology explains:
Vehicle ownership rates may fall by almost half as families move to having just one car… Driverless cars will travel twice as many miles as current autos because they will transport each family member during the day.
Barclays analyst Brian Johnson predicts that large-volume automakers “[will] need to shrink dramatically to survive.” Jointly, companies including GM and Ford “would need to reduce North American production by up to 68 percent and 58 percent, respectively.”
On top of lower vehicle sales, there will be a massive reduction in the U.S. workforce, at least in regards to specific job type. Truck drivers, taxi cab drivers, valet drivers, postal workers, food delivery drivers — all these positions are at threat of losing relevance.
The good news, at least, is that the market for autonomous vehicles is expected grow to $42 billion by 2025, according to Boston Consulting Group. This opens up a massive investment opportunity for those keeping a close eye on this emerging technology.
And if you think any of that sounds far-fetched, consider that Uber announced earlier this week that it has signed a $300 million deal with Volvo to provide driverless taxis. As Bloomberg reports, the goal is to replace Uber’s more than one million drivers with robots “as quickly as possible,” an effort that will begin as soon as next month, when Uber reportedly begins using self-driving cars with customers in downtown Pittsburgh.
Until next time,
Jason Stutman
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