The Economy

You seem to always want to turn things into a moral question. ... like nobody forced such and such to overleverage themselves. Or nobody forced a stripper with no verifiable income to buy 3 homes whose values had shot up during a bubble with a no-money-down subprime interest-only loan that was going to reset to an ARM, etc. ...

For me, it's not, "How stupid of them to buy cars they can't afford." It's .... how was it POSSIBLE for people to do those things, when an actual market would naturally regulate it from happening?

Right now. ... I see how the average new and used car price over time has blown through the roof, and is outpacing any risk-free return you could possibly earn on your dollars. In just the last four years. ... the average new car payment has increased 27 percent according to TransUnion recently. The average used car payment has increased 34 percent. And because of the affordability problems, the average loan term length has extended beyond 70 months.

The thing blowing the prices of cars higher was the thing that had people being able to finance cars they never should have been able to afford. The typical car payment was in the $500 range just a few years ago, and it had people able to finance $40,000 cars that their income levels shouldn't have allowed. ... IF a market was regulating people's behavior. But again (the theme I bring up that I think you take issue with). ... that is what mispriced debt markets create. That artificial boost in demand (on the back of mispriced debt) is what actually drive up the cost of things making them harder to afford. It works to put people in cars and keep the default rates low for as long as you can keep the distortions in place. ... until it doesn't work. And we are eventually left with reality and out of control debt levels that are swallowing up whole areas of the economy. This was always going to be the end result.

Now, we have a lot of strife over how much prices are rising and how fast and they need to undo some of the ridiculously loose financial conditions that are necessary for the artificiality people have been living with. The result is that even with financing rates (money has become more expensive) having just been normalized a little, it is creating a lot of stress. A typical car payment just a few years ago was in the $500 range (which was already way higher than in the past). Now it is pushing $800. And this is happening at a time that rents are up 30 to 50 percent, food prices are higher, etc.

I don't see a moral failing, except on the part of the people who set us up for what is happening. Human behavior is to respond to the environment you are in. If a central planning authority distorts the price of money intentionally to pull growth from the future forward and entice spending behavior, it's pointless to me to then say, "People should have been smarter than that!" People don't behave that way. Saying they SHOULD be different is silly.

The typical person needs a car, they go in and simply look at their monthly payment and say, "I can afford that." The business that we were discussing yesterday, sees how cheap and easy it is to acquire financing (that would never be available in an unmanipulated lending environment) and being able roll over the debt endlessly and they will push the limit on how much leverage they can employ, because it's other people's money they are taking risk with. And it led to riskier and riskier behavior. SHOULD they have done that? The fact is that that is exactly what happens when those are the incentives being pushed on teh world.

The problem isn't people acting like people (and they are actually being rational). The problem is the distortions designed to create those whacked incentives so some politicians can pretend they created economic growth in the immediate term on what was really just a debt-fueled fantasy that robbed the future.

 

Again, it doesn't mean that someone CAN'T behave the way you do. Lots of people do.

But the reality is that most people will NOT. Many people who don't earn a lot, can't avoid a debt trap.

So it's silly to turn it into a moral failing of some sort. Humans will behave exactly as they are being incentized to act. That is actually the whole point of them manipulating the cost of money (which is the most important price in an economy) to such ridiculously low levels to try to spur more and more consumption. It benefits politicians who are working on daily and weekly time horizons and aren't forced to consider the future credit crises they are setting us up for (and how much worse the payback is going to be for a lot of people than the sugar high was).

Free markets, environments in which people bear the consequences of their decisions without distortions that are designed to push people into distorted behaviors are what regulates behavior.

By hijacking those markets and giving a czar authority to price fix them (always at artificially low levels), what we got is: savers have been punished and robbed of their risk-free return that a free market offers to induce lending, and that forces them to lend in riskier and riskier ways (as the distortions requiered become even bigger) to earn the income they would earn with little risk if they weren't being robbed. ... and debtors are being encouraged to overleverage themslves, because money that wouldn't be available in the first place, and wouldn't be so mispriced cheaply that it is free (or they are being paid to borrow!) in real terms, is being shoved at them.

People just respond in the exact way the distortions were DESIGNED to make them behave.