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Subprime loans are making a comeback, and it's a disaster

Car dealers flexed their considerable political muscle during the Dodd-Frank financial overhaul process and got themselves largely exempted from Consumer Financial Protection Bureau oversight. Coincidentally enough, subprime auto loans are now booming even as lending standards remain relatively tight in the rest of the economy. The CFPB announced in mid-September that it's going to push the envelop and try to tighten the screws on this industry, but naturally there is pushback from interests with money at stake.

And Zachary Karabell in Slate makes an important argument that the return of subprime is a good thing. Important not so much because it's persuasive, as because it highlights a more sophisticated argument than simple banker-bashing. The nut of the argument is here: "tight lending standards and even tighter regulations resulted in an unfortunate return to the era before the 1990s, when a low income might mean you were shut out of homeownership, from simple ownership of a car, or from starting a small business."

In other words, lax credit is good for America.

The question Karabell doesn't answer is what, exactly is the social interest in getting more people to own cars? Is it that the extra cars lead to more traffic congestion? That the extra driving leads to more deaths in car crashes? That it leads to more air pollution? It's a bit of a riddle. Obviously cars are useful things to own, which is why they're such a popular consumer product. But is there any good reason at the margin for the government to make higher levels of car ownership per se (rather than, say, higher incomes) a priority? This is especially true when you consider that for a lot of folks the relevant margin won't be car vs no car. It will be cheaper car vs less-cheap car or car-right now-versus car-in-18-months

And the same is true for houses. If more people get to live in big houses because increased supply has made houses more affordable, that's a clear win. Similarly if wages rise and people get to buy nicer houses, that's great. But if houses don't become cheaper and wages don't rise, what is actually achieved by making it easier for people to go into debt to buy them?

The reference to the bad old days before the 1990s leaves out the fact that until 2000 or so, we actually had a pretty good way of getting families into nicer cars and bigger houses. It was called "rising wages and incomes" and it was delightful. But inflation-adjusted median incomes have fallen since 1999, with consumption levels propped up in the mid-aughts by unsustainable debt levels. Then came the crash, the retrenchment, and a number of very tough years for American families. But returning to the idea of lending people money so they can buy more stuff than their wages will support isn't going to solve anything.

This isn't to say that debt is some kind of universal evil. When it finances productive investments — the building of new stores, factories, houses, and hospitals or additional schooling or medical care — it can easily pay off in the long run. Low interest rates mean that a larger set of investments qualify as paying off, which can be very helpful. But looser lending standards for consumer loans (made possible by the implicit guarantee of government bailouts if too many go bad) doesn't have these advantages. It's just a kind of extremely clumsy and opaque shifting around of economic resources.

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