Gotta Keep Dancing – Honda Executive Laments “Stupid” Auto Loans Driving U.S. Sales Higher

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.

– Chuck Prince, Citigroup CEO, July 2007

We’ve seen this movie before, we know how it ends, and it’s not pretty. But I say that it has longer to run, and we have already paid the price of admission. So we might as well stay to the end. You just keep your eyes on the exit door.

– Tom Webb, Chief Economist at Manheim Consulting, January 2015

The junk being peddled around as auto loans has been well documented here and elsewhere, and links to several articles highlighting this troubling trend will be attached at the end. That said, what is so stunning about what we heard from an executive at one of the world’s biggest car manufacturers, is the willingness to call out the stupidity of what is currently going on. In the process, he shows how completely brain-dead and collectively insane everyone around him is.

Bloomberg reports that:

A top U.S. executive at Honda Motor Co. said competitors are doing “stupid things” to boost auto sales, including making seven-year-long car loans that harm buyers.

Automakers are increasingly selling vehicles with 84-month loans that reduce monthly payments while making it tougher to repay faster than cars lose value, John Mendel, Honda’s U.S. sales chief, said in an interview. The Tokyo-based company will avoid longer-term loans even as Nissan Motor Co. tries to supplant it as the fifth-biggest automaker in the U.S., he said.

“You’re ringing the bell on a new-car sale, but that customer is saddled — they’re stretched so thin,” Mendel said at the North American International Auto Show last week. Extended-term loans are “stupid not just for us, but for the industry.”

The comments by Honda’s Mendel were a rare show of caution during the auto show in Detroit, as car-industry executives cheered the best year of U.S. sales since 2006. Deliveries are projected to rise to 16.7 million this year, which would be a sixth straight increase and extend the longest streak of gains since World War II.

Sales will keep growing as the Federal Reserve’s zero-interest-rate policy encourages investors to collect yield from auto loans, said Tom Webb, chief economist at Manheim Consulting. While not in a bubble, the industry is taking on more risk by extending longer loans with smaller down payments to buyers with blemished credit scores, he said.

Never forget who and what are directly responsible for the next fiasco when it crushes the economy. Just like the last time, the blame falls squarely on Central Banking generally, and the Federal Reserve specifically. It’s the greatest proof since the fall of Communism that central planning doesn’t work, and only results in an entrenched and corrupt oligarchy.

More from Bloomberg:

More than one in four new-car loans in October and November were 73 to 84 months long, according to Experian Plc. The share of new-car loans at those term lengths was less then 10 percent in 2009 and 2010.

You’d think John Mendel’s comments would have stolen the show, but no. Tom Webb decided to showcase what may end up being the best case of verbal diarrhea since Chuck Prince told us to keep dancing in 2007. He may unintentionally go down in history for the following:

“We’ve seen this movie before, we know how it ends, and it’s not pretty,” Webb told reporters at an event before last week’s show. “But I say that it has longer to run, and we have already paid the price of admission. So we might as well stay to the end. You just keep your eyes on the exit door.”

Thanks for the insight Tom.

For related articles on the subprime auto bubble, see:

Just Keep Dancing: Introducing the 97-Month Auto Loan

A Tale of Two Subprime: Homes and Autos

The Debt Bubble Expands as Auto Loan Amounts Hit a New Record

Is the Auto Loan Bubble Bursting? Delinquent Loans Jump 27% Year-Over-Year

In Liberty,
Michael Krieger

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