Lost in the madness of crowds and obscured by the euphoria accompanying the multitude of bubbles inflated by nearly a decade of accommodative monetary policy, are America’s twin trillion-dollar debt bubbles: auto loans and student loans.
Back in 2015, there was no shortage of commentary on the extent to which subprime auto lending and the massive student debt overhang were imperiling the financial system and erecting barriers to household formation, respectively.
Perhaps my take on this is colored by the fact that during 2015, I myself covered these topics extensively, so maybe the reporting hasn’t in fact dissipated or otherwise taken a backseat to more pressing matters such as Bitcoin, the Nasdaq, and the fact that since 2015, America has been careening down the path to authoritarianism.’
Whatever the case, we shouldn’t lose sight of these two trillion-dollar bubbles because, well, because they are trillion-dollar bubbles and generally speaking, trillion-dollar bubbles do not just go gentle into that good night.
To be sure, neither of these bubbles pose the same systemic risk as the housing bubble and there is a vociferous debate about the extent to which the subprime auto issue has been blown out of proportion by those who have seen “The Big Short” eighteen too many times. Still, as Bloomberg noted early last month, “nearly 9.7% of subprime car loans made by non-bank lenders — including private-equity-backed firms catering to car dealers — became 90 or more days past due in the third quarter, the highest annualized rate in more than seven years.” Lending standards appear to be deteriorating and the usual suspects are of course front and center in the debate (e.g. Santander Consumer, American Credit Acceptance, etc.).
Meanwhile, the student debt situation is particularly worrisome, if not for the financial system, then for the economy, for the government and by extension, for taxpayers.
“The delinquency rates on student loans are much higher than for other types of consumer credit, as student loan programs have relatively looser underwriting, student loans are unsecured, and because non-performing student loans cannot be charged off even in bankruptcy,” Goldman writes, in a note dated Tuesday.
Have a look at the following chart which shows the rate at which student loans and mortgage loans transition into serious (90+ day) delinquency: