With LinkedIn's (LNKD) gangbusters IPO, there's a lot of talk about whether we are or aren't experiencing a new tech bubble. The very concept scares people, as it evokes memories of Pets.com. But there is one place where we need a bubble and need it bad: subprime auto loans.
May car sales are going to look pretty bad, according to some advance estimates. In fact, the whole summer is shaping up to be sluggish, even as carmakers like Ford (F) and General Motors (GM) find out that consumers are actually interested in buying small, fuel-efficient vehicles from them. The end of the year should be better, but what all automakers could use right now are willing consumers who are able to buy even if their finances aren't totally up to snuff.
Don't give a damn about subprime's bad reputation
The very mention of the word "subprime" seems sort of sketchy, due to the hangover from shady real-estate lending practices. But when you're talking about auto loans, you're not dealing with hundreds of thousands in borrowing, nor four-figure monthly payments.
For a period of time after the onset of the financial crisis and the credit crunch, buyers needed sterling credit to finance a car. This was understandable, as all the institutions in the auto-lending game were pulling back massively from risk. And of course some lenders were affiliated with car companies, so their futures were completely unclear.
But as the economy recovers, the subprime stigma should fade. It will have to, as people who may have been ravaged by a home foreclosure or simply been unemployed for a while are going to have cash coming in -- assuming they can start working steadily again -- and are going to need wheels to get around.
It's about the profits, stupid
General Motors, with its new GM Financial arm (a rebranded subprime lender that GM recently acquired), is already preparing to service this market. But if the poor summer sales is going the meaningfully offset, a subprime auto loan bubble needs to inflate.
The magic number for 2011 U.S. car sales is between 12.5 and 13 million vehicles. The current rate, figuring in a bad May, is more like 10 million. That's a dark-days-of-2009 number that few expect to play out, as simply replacing a very aged national fleet should add the necessary millions to the 2011 total.
However, we can't forget about the weakness the Japanese are experiencing, due to the supply chain crisis brought on by the quake and tsunami. Toyota (TM) and Honda need to make up lost sales just as much as General Motors and Chrysler need to get back on track after bankruptcy.
The only thing that will make that happen is profits. Profits created by both sales and, on the financing side, higher rates.
The best of both worlds
Now, you might say that this is horrible, that we'll once again go down the road of lending to people with sketchy credit only to see a wave of auto repossessions in 2012. But I don't think that will happen.
The difference between prime and subprime terms, if you have a job, isn't that onerous. True, a subprime rate is annoying, but if you were formerly driving an unreliable 10-year-old car and living on the dole, you're probably thankful that you can get a loan at all. It would be a relief to be able to pay too much each month.
But in order to access that money, and keep the economy moving in the right direction, subprime lending needs to expand. Sometimes, a bubble can be beautiful.