It is Obvious

Chris Rick has got altogether too much to say

On a street near you…

Posted by chrisrick13 on August 23, 2017

It is obvious: it all works well


Do you remember? ten years ago and more. Lots of stories about US sub-prime mortgages. TV news with whole streets in towns where everyone had handed their keys in and walked away…often to homelessness.

Bit of a giggle happening so far away. Never affect us.

The US system was different as the property was the asset backing the loan so there was no comeback on the people who had taken out the loan. In the UK of course if you do it the bank will sell the house at a knock-down price and come after you for the rest. However for a lot of people, that would be a waste of time and a long, long wait for any money to come in. Indeed it is why government and BoE strategy is to boost asset prices and keep interest rates low – until they can’t. That is another story hitting a cinema near you soon enough.

While I’m at it, houses in this country are worth £9 trillion. Which pre-supposes that someone with a spare £9tr is around and willing to put their hands in their pockets. That is yet another story. The people relied on for that £9tr are first-time buyers. These are the people with £50,000 of student loan debt, wages that need them to live with mum and dad to actually have money left to buy food with, and wage decline (carefully hidden by the fudged inflation numbers that for some reason don’t include food or housing costs).

We have learnt from history though and such a scheme will not happen again. It is a variant on Einstein’s comment that to keep repeating an experiment expecting different results is insanity.

We can’t repeat history because there is a lot of change going on at rapid pace. For example driverless cars are not far away. Trying to assign blame in car crashes is a huge distraction from the important stuff. There will be far fewer of them. Insurance companies will be happy to take up the slack as they will be making a lot more money. All the cameras will make sure that accidents are very well documented. If someone runs into the back of you it is their fault. Soon enough if a crash happens between a human driven and driverless car it will automatically blamed on the human.

The model for the car manufacturers will change as they will produce cars and rent out journeys. They will soon sell few cars. Hold on though, isn’t that what is happening now? Car manufactures produce cars and the manufacturer’s finance company extends a loan so that the punter (you and me) can have possession of the car for 3 years and then hand it back. We are renting 3 years of journeys?

The residual value of the car guarantees the loan. So there is no risk. If you can no longer afford the payments you give it back. The finance company then sells it and recovers its loan. Everyone is happy. Trouble is the residual value is at £X and the value is plummeting. It means that the finance company will be lucky to get £0.5X. There is also the loss of income for the finance company as the interest on the loan is no longer being paid. The car manufacturer finance company will take the manufacturer with it if it goes bust. It will take a lot of jobs as well. Many more than a bank. I wonder if car manufacturers are too big to let fail because they all did not so long ago.

Doesn’t this sound a lot like the sub-prime home loans of 10 years ago? At lot of deja-vu still hanging around.

It is obvious: it all works well…until it doesn’t

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