DANIEL VAUGHAN: Biden's Economy Welcomes the Repo Man

 April 24, 2023

There's a growing yet familiar story developing across the country. As the pandemic ebbed as a front-burner issue, inflation skyrocketed on practically everything. One of those categories was used cars. If you were in the market for a used car and purchased one, odds are you overpaid for something with likely repair issues. That's the first problem; the second problem is that repair costs skyrocketed, too, often outpacing the car's value.

Now you're faced with an expensive used car that no longer runs correctly. This is beyond being underwater on a loan. You're underwater with an unusable vehicle and may be unable to get to your job. NBC News reported on the increased risk Americans face from car repossessions right now. They talked with a woman who was behind on payments, needed her far for her job, and could not escape the mess.

The pandemic issue where car manufacturers couldn't make new cars fast enough forced people onto used car lots. According to the Wall Street Journal, "Some 19% of used cars that were registered in 2022 were between eight and 11 years old, up from 15% in 2018, according to data from credit-reporting firm Experian PLC. By contrast, 11% were between zero and three years old at time of registration in 2022, down from 14% in 2018."

From car loans to real estate, credit is tightening.

What's the result of all these issues? Business is booming if you're a repossession company getting marching orders from banks. Car repo companies are gearing up to take on increasing business for the next year or more. The number of people behind 60 days or more is skyrocketing, forcing banks to take action.

It's another microcosm of a more significant economic crisis in an economy that is nowhere near as strong as the White House claims. The story with car loans is similar to the growing issues in the commercial real estate sector. Some commercial real estate landlords underwater with loans are choosing to walk away and let the banks deal with it rather than eating the losses from selling the property.

In the midst of our weaker economy is a banking crisis that hasn't entirely ended. While no more banks have failed, the Federal Reserve continues to pump emergency cash into the system. Small and mid-sized banks face increasing pressure to cut back on loan services as money becomes harder to come by in that sector.

Banks are making it harder for people to get credit.

Nick Timiraos, the Fed Whisperer, noted the problem in his latest column:

For hundreds of smaller banks, the likely solution will be to reduce lending. "What's going on nationwide is every one of these banks has either frozen their loan-to-deposit ratio or, more likely, is very intent on shrinking it," said former Dallas Fed President Robert Kaplan on a call hosted by investment-banking advisory company Evercore ISI this month. "That is why a lot of small and midsize businesses in this country are getting a phone call saying, politely, 'At the end of the year, we are not going to be able to give you a loan anymore, or we're going to reprice your loan.'"

If you're behind on a car loan, that means there's not much help coming your way. The same is true for any business with commercial real estate or other loans.

Credit is getting harder to get for most people in every form. And the Treasury Department is also starting to get nervous about the shadow banking sector. These institutions often swoop in to provide credit or buy loans when regulated banks do not. They've grown in size and influence since the 2008 Great Financial Crisis.

The credit crunch is here. Next up recession.

Investors are scrutinizing everything that banks are handing out, questioning them. The new term is "scrutinized loan." These are loans "that show preliminary signs of higher risk, such as a developer who's making payments but is otherwise having financial trouble, or an office building that recently lost a big tenant and needs to replace it."

There are flashing red lights everywhere. It's an economy with warning signs in every sector, around every corner, and on loans of all kinds. You can see them from people who can't afford something as simple as a monthly car payment to large real estate investors behind on payments. In an economy like the United States that relies heavily on credit, everyone is feeling the crunch.

Meanwhile, inflation continues to run hot, causing continuing issues for everyone. The Federal Reserve hasn't solved the inflation problem, and now there are cracks all over the economy. We're entering the first real credit crunch since 2008, and there's no sign anyone is ready for it.

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