The new 0% financing problem

Posted by Ray on January 26, 2010 under Main | Be the First to Comment

Everyone remembers the aftermath of 9/11/01 and how horrible those days were, but what sticks out in my mind, after the obvious, was what happened after words. The President said to get out and shop, and boy did we, but the thing most do not recall is what the auto industry did to boost sales, 0% financing. This was the beginning of the end for the auto industry simply because how can you ever raise financing costs after you go to 0%. The demand that 0% financing created meant that the automakers would have a heck of a time raising those rates and they needed the sales. It essentially created a major problem for the industry which help speed its way into bankruptcy.

We are seeing the same thing happen in housing with all the government help being injected into the market. We have tax credits to encourage buying, but we also see what the market looks like without those credits, see recent home sales data, and we have the Fed lowering mortgage rates like mad with QE. What happens when/if these programs stop? It will get ugly, just like when the automakers tried to stop 0% financing. If you do not let the markets work their magic, i.e. stop malinvestments, the pain is just prolonged. GM and Chrysler should have gone out of business a few years ago but that 0% financing helped keep them around, however it could not stop the inevitable.

The mistakes made by the automakers are being made by the government with the housing market. Homeowners already enjoy a ton of tax breaks, mortgage interest deductions, property tax deductions, etc. and the last thing they really needed was a tax credit to buy a home. It has helped, the data shows that, but the problem is these programs have to end and then what happens? As we have seen already, with limited data of course, is that housing does not move without that tax credit. Sure we can blame the weather or whatever external force we want, but that is ignoring the obvious, housing wants to go lower. That leads me to believe that more tax credits are on the way and QE is a permanent fixture at the Fed, see Japan.

When you incentivize buying to such a degree you create a major problem for yourself, or the country in this case, as you boost expectations on false hope. Once you remove those incentives and reality sets in you are stuck with doing nothing, clearly something government does not want to do now, or let the market sort things out, what should happen. Because the government has created false hope for a housing recovery they have created more problems than they solved. The sales we do see now are false demand, meaning it is only there because of the rich incentives, which means that many economists and market participants are creating strategies or projections around numbers that are not real. The fact is that without a natural housing recovery the economy cannot recover.

While the insane 0% financing hastened the decline of the automakers into bankruptcy, in my opinion, the government is simply slowing the fall of housing or kicking the can down the road a bit. The good news is that at least the incentives will not cause the government to go into bankruptcy, well on their own at least, but it is an enormous waste of money. The government should step back and stop what they are doing and the Fed needs to stop its QE program. If neither stop and they continue doing this the next leg down will be ugly and, the reality is, we do not need more incentives to buy houses, look at the tax breaks you get now. False demand creates false hope which lures investors into investments they ordinarily would not buy. When that false demand and hope disappear those investments decline in value, investors are being suckered.

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Why American Car Makers Fail

Posted by Ray on August 30, 2009 under Main | Be the First to Comment

Just when you think the Big 3 learned their lesson they go and repeat the same things that got them in trouble to begin with. One would think that after 2 decades of bad decisions and one other major bailout from the government the industry would get its act together, but that is not the case. The only one of the Big 3 I have respect for is Ford, who told the government to pound salt over the terms of a bailout, but that makes me question why they went to the bailout table to begin with.

However, all three just made the worst decision of all time, well kind of. It appears that they bought into the whole ‘the economy is recovered’ and that the artificial demand for cars, through cash for clunkers, is somehow permanent. In fact, there is little demand left for new cars and all the pent up demand for cars was pushed forward to now through the very expensive government incentive.  Unfortunately, the greatest recipients of the whole cash for clunkers deal were the Japanese car makers, not the Big 3.

Toyota has realized this and has recently cut their production by 10% and, for the first time ever, closed a plant down. However, the Big 3 has done the exact opposite of Toyota, which shouldn’t surprise anyone. GM and Ford recently announced the addition of more shifts, rehired workers and boosted output by 10%. All when traffic in dealerships is reported down 10% below Junes traffic.

I guess when you are backed by the government, except for Ford, you can afford to do this, but it is not reassuring to me to see that type of decisions being made. Especially since we are, more than likely, not out of the recession and the consumer is still not spending money. Not to mention that 25% of people buying cars under the cash for clunkers program have buyer’s remorse which goes to show they really never wanted to buy a car, but free money is free money.

What you can surmise from this is that the big 3 are living in a fantasy land while Toyota, Honda and Hyundai continue to clean the clocks of its US competitors. It makes zero sense that the Big 3 would ramp up production when the more successful Japanese makers are cutting back, perhaps GM and Ford know something we don’t, but I highly doubt that.

Based on this recent decision to ramp up production it is really no wonder why 2 out of the Big 3 failed, miserably I might add. Not to mention this is Chrysler’s third chance at survival after they were successful after the first bailout, but their second failure just illustrates how bad their business plan was to begin with.  In my opinion, I think any car maker is far from a buy as I see shrinking credit and lack of demand driving car sales further down instead of up.

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