It appears that the housing bubble that almost bankrupted the world economy in 2008 wasn't enough. In a new article that appeared in today's blog on ZeroHedge, Jamie Dimon of J.P. Morgan has observed a huge increase of subprime loans in the auto industry. Predictably, the "experts" have decried such a thing as preposterous, just like they did with the subprime housing market. The rationale, according to one such expert, Mike Jackson CEO of Auto Nation, says that because auto loans tend to be less than mortgage loans, they won't go into default. "People pay their car loans," said Jackson. Where have I heard this before?
The fact is, people pay their mortgages, when they have the money. Similarly, people pay their car loans, student loans, credit cards, etc., when they have the money. What caused the housing bubble to burst, simply put, was a downturn in employment (an income-based inability to pay) coupled with risky loans. That is, virtually the only necessary requirement for a mortgage loan, was a pulse.
It's unlikely that if a supposed auto loan bubble was to burst it would have the same impact as the housing bubble. But, it wouldn't be good news for an already shaky auto manufacturing sector. What will happen remains to be seen. There is already a significant rise in auto loan defaults, with higher rates predicted. Another thing to keep in mind is that mortgage loans are securitized...auto loans are not.