Just a few short years ago, Americans were buying new cars and trucks at the remarkable clip of 17 million units a year. The auto companies got that many people into shiny new vehicles -- with an average price of over $25K -- by selling them a massive load of debt. They accomplished this, in part, by pushing loans with little money down and terms extended to 6, 7, and even 8 years and by obscuring the total cost of ownership by turning us into payment shoppers (just $199 a month!). With fewer than one in ten cars purchased with cash, car loans grew to become a larger component of national household debt than credit cards, itself a crushing $800 billion dollars.
Like the home mortgage market, the similarly bloated car market was not sustainable at that level. The car bubble couldn't expand forever, with a national personal savings rate approaching zero, but one good banking panic and millions of job losses later, it burst spectacularly. Vehicle repossessions mushroomed, car sales cratered to 9 million, and GM and Chrysler cried, "Bailout!"
But as 2010 draws to a close, car sales are rebounding, up 13 percent in October and 17 percent in November. GM's IPO was oversubscribed because we started buying cars at a faster clip, induced by the year's tremendous increase in car advertising. It would be more appropriate, though, to note that it is car loans that are on the rebound and that the car bubble is inflating again. In fact, the much-touted improved profitability of many car companies is not based on earnings from manufacturing or selling the vehicles but from charging interest to those buying them. In other words, we're only reducing our national debt through recouping bailout funds by increasing our household debt through buying heavily-financed new cars. And the automakers will be under increased pressure in the coming years to increase financing profits as rising gas prices and tightened environmental regulations lead to fewer of the high-margin SUV sales that fed the industry's last boom.
Never mind that, though. There are more people on the assembly line churning out cars again, right? And aren't there jobs to be had in car loan offices? Perhaps. But the real jobs growth will likely be seen in a few years in the car repo industry. Because this newest car bubble is no more sustainable than the last.
Households are taking on new car debt while unemployment and underemployment still plague or loom on the horizon for huge numbers of families. We are taking on new car debt when our education and retirement accounts have not emerged from the pit into which they fell in 2008. When dealers, with a straight face, tell us to "invest" in a rapidly depreciating minivan or promise that a new electric vehicle will repay itself with the environmentalist virtue accrued in heaven, and it works, it's because we've been watching too many ads and listening to too many in the political class and automotive press tell us, yet again, that what's good for GM is good for the nation. And although the new Consumer Financial Protection Bureau is in place to protect us from some other credit abuses, it won't be there to help us with our car loans -- because the auto dealers that account for so many of these loans exerted their considerable political influence to elude its oversight. But it's not hard to imagine this next bubble bursting. How ready will we be to save the industry again with another bailout?
Mobility is a crucial public good. It's a human right, even. Our families and our government shouldn't have to go broke getting it.