Deformations On The Dealer Lots: How The Fed’s ZIRP Is Fueling The Next Subprime Bust

On any given day, Janet Yellen is busy squinting at 19 essentially meaningless labor market graphs on her ‘dashboard’, apparently looking for evidence that ZIRP is working. Well, after 71 months of zero money market rates – -an unprecedented financial absurdity – -there are plenty of footprints dotting the financial landscape.
But they have nothing to do with sustainable jobs. Instead, ZIRP has fueled myriad financial bubbles and speculations owing to the desperate scramble for ‘yield’ that it has elicited among traders and money managers. Indeed, the financial system is literally booby-trapped with accidents waiting to happen owing to the vast mispricings and bloated valuations that have been generated by the Fed’s free money.
Nowhere is this more evident than in the subprime auto loan sector. That’s where Wall Street speculators have organized fly-by-night lenders who make predatory 20% interest rate loans at 115% of the vehicle’s value to consumers who are essentially one paycheck away from default.
This $120 billion subprime auto paper machine is now driving millions of transactions which are recorded as auto ‘sales’, but, in fact, are more in the nature of short-term ‘loaners’ destined for the repo man. So here’s the thing: In an honest free market none of these born again pawnshops would even exist; nor would there be a market for out-of-this-world junk paper backed by 115% LTV/75-month/20% rate loans to consumers who cannot afford them.
Indeed, instead of the BLS concocted ‘quit rate’ and other such aggregated data noise about the nation’s massive, fragmented, dynamic and complicated complex of thousands of local and sectoral labor markets – – about which the Fed can and should do nothing – -Yellen might be gazing at the $1.6 billion in bids attracted earlier this year by Prestige Financial Services of Utah. That occurred in the junk bond market, which the Fed does heavily impact, and could not have possibly happened in the absence of ZIRP.
In a word, the $390 million offering was 4X oversubscribed – even though the bonds were issued by a newly minted financial conduit that has no operating history; and its only assets are piles of 20% interest rate loans made to people who have been in bankruptcy!

This post was published at David Stockmans Contra Corner on November 19, 2014.