We are meant to believe that this can’t cause another crash because car loans make up quite a small part of the loan market.
The problem with this argument is that the loss of the mortgage market didn’t cause the financial crisis, it was just the trigger.
It only caused massive secondary effects because the entire system was unstable, and it still is.
Before the crash the sub-prime mortgage market only made up about 25% of the US mortgage market as a whole, which was an absolutely tiny slice of the global economy. A crash should have wiped out the mortgage market and stopped there. It span out of control for many interlinked reasons that have been debated at length.
But all of those reasons can be summarised very simply: everyone, at every level of the economy, took out loans that they had no way of repaying.
The banks were giving mortgages to people they knew couldn’t repay them, this caused the mortgage market to crash. The crash of the mortgage market meant people who’d invested in it couldn’t repay the loans they’d taken out to fund their investments.
And so on and so on until the entire world economy has been kicked in the nuts.
But the crash of the mortgage market wasn’t the underlying problem, it was just the final straw.
It’s kinda like if all your blood gets drained by a vampire. The technical cause of death will be that your heart stopped beating.
Which is kinda true, but it really isn’t the main problem, it’s just the last thing that happened.
So let me say it again: The financial crisis didn’t happen because the mortgage market crashed, it happened because everyone, at every level of the financial system, had taken out loans that they could not repay.
If everyone had only taken out loans that they could pay back, would the mortgage crash have caused the financial crisis?
No, the damage would have been confined to the US mortgage market, not the entire economy.
So the mortgage market crash is not sufficient to cause the crisis; something else must have gone wrong.
On the other hand if everyone had taken out loans they couldn’t repay and the mortgage market had remained stable would everything have been fine?
No again, because any financial shock could have wiped out other parts of the economy, which would have had the exact same effect of causing people (and whole countries) to default on their loans, thus triggering the exact same financial crisis.
So the mortgage crash is also not necessary for a crisis to be caused.
You don’t need to be a mathematical genius to work this out.
You could do whatever the fuck you wanted to the mortgage market and a crisis would not occur, if the rest of the system was stable. And the mortgage market could be as solid as a fossilized poo and the crisis would still be inevitable because the entire financial system was inherently unstable and unsustainable.
When I’ve raised this issue with actual economists they have either patted me on the back for figuring out something that they’ve known for decades.
Or their answer has usually been along the lines of “yes you’re right, but that’s just how things work”.
These economists acknowledge that the crisis happened as a result of so many people taking out loans they couldn’t pay back, but they say that we should all pretend that this is not a problem; it’s just the new normal.
Yes, they are that stupid.
Yes, they are that bad at learning from past mistakes.
So when people say that we shouldn’t worry about the sub-prime car loan market taking off because it’s a ‘small part of the economy’ I just groan, and start putting money under my mattress.
[Standard Disclaimer: this post was entirely my own opinion and was not paid for in any way, directly or otherwise, by anyone or anything that stands to gain in any way from the ideas expressed herein.]