Toyota and the Repo Man – The Banks and Where We Are
We got to where we are, as discussed in the first two Parts, because of car companies and oil companies.
But it was the banks that played the pivotal role in expanding consumer spending to today’s levels.
Banks are in the business of renting money. Bankers may not be terribly imaginative, but when someone elbows into their turf, they fight back. Once someone else had invented the concept, bankers instantly understood what had been created.
The credit card was a way to rent money to everyone in the United States.
This is where the nature of automobile lending changed completely.
(more after the jump)
Up until the invention of the credit card, there were only two things you could buy over time on monthly payments: your house and your car. Oil companies added to that, as did department stores that individually offered revolving charge accounts.
But it was the banks that began to issue their own credit cards – MasterCard and Visa – that had the transformative role in automotive lending.
Of course, people didn’t buy cars with credit cards.
But, they could buy just about anything else with one.
This gave every other consumer goods industry exactly the sales advantage which had previously been the monopoly of the auto industry: immediate gratification. You could buy it now and pay it off over time.
Want to see this in its pure form, today: Watch a current television ad for Chase. Husband and wife are watching television together when the old set finally dies and the wife says, “OK, I admit we need a new TV.” Instantly, the music swells, the man grabs his Chase card and the picture fades to a store wall of big screen TVs.
The voice over explains that he can access his Chase account to see his credit balance and, thereby, know what he can buy. In other words, Chase will help him max out that credit card, to the penny.
Credit cards not only meant that consumers could buy other things than cars on time, it also meant that they were loading up with debt owed for those other things. Not only was the color television set, or the second or third one, competing with the latest from Detroit, but it was doing it with every monthly payment.
For a very long time, the logical effect of this competition was masked by two economic factors: inflation and real increases in productivity. Workers became more educated as technology increased what they produced and the role of women changed from housewife to second income.
But, the bottom line remained: a new car was now just another consumer good that you could buy on a monthly payment, one of many.
In the 1950’s, auto manufacturers had realized how much profit was to be made by car loans, so they had all set up credit operations to make car loans directly to consumers through dealers. In doing that, of course, they were competing against banks. But, they had an inherent advantage because the dealer selling the car could also write the loan: one simple transaction in one place, and the keys were yours.
The car manufacturer’s credit businesses were very profitable, so much so that they eventually became the overwhelmingly dominant source of car loans in the United States.
But, these were credit operations that existed to make it possible to sell cars. No car sales, no car loans. Car companies could make a profit (and, of course, eventually it got to this) even if they didn’t make a dime selling the car if they made the car loan.
Car companies, thus, had the means to fight back against the competition of credit cards by themselves controlling the terms of car loans, making their terms as attractive as necessary to move the metal.
In the process, the carmakers ended up doing essentially the same thing the banks were doing: issuing unsecured loans.
They’re still doing it.
Three year loans became the norm, then five, and now it’s approaching an average past six, going on seven years. Twenty percent down became no money down, and now it’s no money down and wrap in the old loan.
The whole pyramid scheme depends on someone loaning the customer more money long before that seven years is up. More money than he or she borrowed last time, enough for yet another new car and loan roll over.
To keep this scheme from imploding, car makers have resorted to leasing and, most recently, to using “certified used cars” as a mechanism to artificially diminish new car depreciation. However, these are merely artifices designed to artificially stimulate new car demand. None of these alter one fundamental reality.
No one who signs a seven year note for a new car has any real reason to pay it to maturity.
The carmakers selling in the United States market have mortgaged the future of that market to the breaking point. The only thing that can bail it out now is the eight year car loan, then the nine, and eventually the ten year loan.
In other words, the only thing that can save the market is the willing suspension of disbelief by the nation’s lenders.
The problem with pyramid schemes is that once they begin to collapse, they collapse quickly. Every investor wants to get his or her money out, right now.
In an industry which has become dependent on the commonly held belief that the consumer will always be able to borrow more, when everyone knows it can’t be true forever, a collapse of the new car market could be both sudden an precipitous.
The question is not “if.”