Subprime loans drive auto recovery

The scramble for profits is again leading to overproduction and the pushing of high-interest loans, this time in the auto industry. The capitalists are worried but keep doing it.

For the bosses the recovery in auto sales is the one relatively bright spot in the capitalist economy. But that “bright spot” is about to get dimmer. While the recovery was kick-started by closing down auto plants, slashing wages in half and automating, it is now being driven more and more by subprime auto loans.

Inventories are building up. Loan companies, hedge funds and bankers are selling subprime-backed loans the way they did in the run-up to the economic crisis of 2000-2008.

And the working class, particularly in auto and related industries — not just in the U.S. but in Mexico, Canada and elsewhere — should take note of this and prepare for future attempts to remove shifts and shut down aspects of production.

Business Week warned as early as last fall that “as the fifth anniversary of the Federal Reserve’s policy of keeping interest rates near zero approaches, the market for subprime borrowing is again becoming frothy, this time in the car business instead of housing.” (Nov. 27, 2013)

As auto sales rose, subprime loans accounted for more than 27 percent of new vehicle loans in the first half of last year. The magazine noted that this was “the highest proportion since Experian Automotive began tracking the data in 2007.” The subprime loans are being packaged into bonds and sold on the market to profit-hungry investors.

By the third quarter of 2013, subprime-backed bond sales had soared to $17.5 billion, more than double the amount sold in the same period in 2010 and only $3 billion below the peak in 2005 of $20 billion. “Perhaps more than any other factor, easing credit has been the key to the U.S. auto recovery,” Adam Jonas of Morgan Stanley wrote to investors in an October note.

Equifax Inc. reported 6.6 million subprime auto borrowers as of last April, and the number is rising. At the same time, court records showed a rising number of defaults and personal bankruptcy filings. (Reuters, April 3, 2013)

The capitalists know that most workers need cars to get to work, go shopping and visit friends and relatives. So the financiers can charge from 10 to 20 percent usurious interest. The industry already expects 25 percent defaults and repossessions.

Race for market share — and overproduction

Some 3.45 million unsold autos sat in car and truck dealerships by the end of 2013.  Each of these vehicles is counted as a sale by the auto companies. And the dealers are under pressure to meet quotas set by the auto barons.

Subprime loans are fueling overproduction in the race by the car companies for market share. “U.S. dealers have about $100 billion worth of unsold cars and trucks sitting on their lots,” according to Mike Jackson, CEO of AutoNation, which owns the largest chain of car dealers in the U.S. (Automotive News, Feb. 4)

Jackson was cautiously sounding the alarm about overproduction. He said inventory levels at car lots were at 90 to 120 days of supply. The healthy norm, according to the industry, is about 60 days.  Each of the Big Three Detroit automakers has well over 100 days’ supply.

“Everybody has very rich targets. If you add up everybody’s targets, we should be selling over 18 million vehicles, but that’s not the case,” said Joe Langley, production analyst for IHS Automotive. The industry sold 15.6 million vehicles in 2013 and is counting on an upturn in the economy to push sales higher.

“The problem is the rules of past recoveries — where employment and income come roaring back along with auto sales — do not apply in this slow-growth economy,” said one Michigan auto consultant. “It’s a new world. We’re in the unprecedented position of being five years after a recovery and still a million jobs below where we were at the last peak. And you need a job to buy a car.” (AN, Feb. 4)

They may be on the brink of widespread overproduction but, in the irresistible struggle for markets, each capitalist in the industry is planning for expansion.  At the auto show in Detroit in January, Volkswagen, Honda, Mazda and Nissan announced plans to expand production in North America. Toyota, Ford and GM announced plans for expanding production within existing capacity.

Finance capital revisiting the Great Recession

So the automakers are pushing more and more vehicles onto the car dealer lots. Overproduction appears as inventories build up. Pressure to sell becomes unbearable. The dealers seek out subprime loan outfits to boost their sales. The banks and hedge funds seek out the subprime dealers to sell bonds and make a killing — until the whole thing collapses.

Businesses then close or cut back and workers get thrown onto the street, lose their homes, their cars, their savings and their possessions, forced to join the already massive army of the unemployed.

Look behind subprime dealers like Exeter and others and you will find funding from Wells Fargo, Capital One, GM Capital, Goldman Sachs, Deutsche Bank, Citigroup, Blackstone, Ally Financial and a host of other financial parasites who were behind the subprime mortgage crisis that precipitated the economic plunge of 2007-2008.

The bosses and bankers do what capital must do. They seek the highest rate of profit.

Under present conditions of automation, robots, job-destroying software, low wages and mass unemployment, the fastest and surest way to make the highest rate of profit is through preying on the workers — feeding them cheap loans that are bound to end in default and crisis, all in an illusory pursuit to overcome the pressure of overproduction.

But they are also driven to create a dispossessed class of workers and oppressed people who are bound to rebel, en masse, against this reckless and intolerable system of capitalist exploitation.

Fred Goldstein is the author of “Low-Wage Capitalism” and “Capitalism at a Dead End,” which has been translated into Spanish as “El capitalismo en un callejón sin salida.”