When it became apparent just how serious the coronavirus crisis was going to be - or to be precise, at exactly the time that Rishi Sunak thought £12bn should cover the cost in his budget of March 11 - I suggested that it was essential that the UK put various payment holidays in place to maintain households cash flow.
So, I argued for mortgage holidays, and now we have them.
I argued for rent holidays, but we have not got them.
And I also argued for bank loan, credit card and car loan holidays.
We've got some credit card and loan holidays, but car leases are only just getting attention. The Guardian reports this morning:
Fears are growing of a crisis in the UK's £75bn car loan market, where 6.5m vehicles have been financed through leasing deals with monthly payments that are already proving unaffordable for some laid-off as a result of the coronavirus.
The Finance and Leasing Association (FLA), which represents the credit arms of the car manufacturers as well as the banks, said: “It's early days in terms of quantifying the impact on arrears, but the number of forbearance requests has grown significantly in recent weeks.”
That this would happen was entirely predictable. Indeed, it was inevitable. A person who has lost their cash flow, whether they are furloughed, unemployed, or who simply has a business that is collapsing and getting no support, is going to cut every expenditure that they can, and vanity cars are high on the list of things that can be done without. It was inevitable that car loans were going to fail, and in very large numbers.
Unless, that is, help was going to be supplied.
The first help would be holidays: these should simply be automatic right now, with no impact on credit ratings.
And second, considerable loan extensions at much lower rates should be possible.
This matters to some degree for those with the cars: they will still need cars in most cases when this is over.
It matters as much for the banking system, where bad debts need to be avoided if we are not to have a banking crisis, and these loans are usually funded through banking-related affiliates. Rearranged loans do not precipitate loss recognition on balance sheets and so create that crisis at present; bad debts do. So re-arrangement is key.
But for the time being we may also need this to keep car worker jobs. In the long term we need fewer cars in the UK. We certainly do not need the ones we have now. But we also need to keep an industry capable of making the transition to being the one that we need, and that means that an orderly transition is required. If there is a glut of almost new cars on the market just as hard hit car companies try to recover any offer they can make will be massively undercut by the availability of cheap and near new second-hand cars, with a price crash almost inevitable as a result. This does not make for an orderly transition: it makes for a potential meltdown when that will not be what is required.
I'm not being a petrol head here: far from it, in fact. But the fewer melt-downs, whether in banking, car manufacturing or anything else, that we can avoid the greater the chance there is of an orderly survival of this crisis. We are a very long way from that chance right now, but action now can help enormously. Keeping cars with people right now will help. There is a short term cost, but the long term cost will be very much higher if that does not happen. Some big thinking is needed here. I hope someone is doing it.
I'd add one thing: in future debt has to be far less readily available for cars. Then we'd to the rash of wholly unnecessary SUVs tat are causing so much environmental damage. But right now, that's an issue for the transition. Today we need to stop a meltdown.
NB: For those technically minded there is some more on the accounting for this, which supports my views noted above, here.
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So, you’d like to remove people’s responsibilities for their debt. What about those of us who have not been profligate in our spending and have managed to pay down our mortgages, not taken out loans for luxuries like new cars and new kitchens? We have created a debt-ridden economy and lately it has been borrowers who have been benefitting. When will the tide turn to benefit the savers?
Small mindedness and self-righteousness will get you nowhere, and I say that as someone who has at the age of 62 become debt-free, and likes the fact
This is a systemic failing and if the system fails I assure you that those who have been prudent will also suffer greatly
Well, it’s clear I am no economist, but that doesn’t stop me trying to understand what is going on, or what is the right way to live…..
I am by nature someone who only buys what they have adequate resources for – I am fortunate (although my wife prefers the term ‘tight’ for some reason..)
BUT I agree that payment holidays on car finance are essential – these have been massively oversold to all and sundry, by an industry well versed in pushing the buttons. Not unlike Pringles (other snacks are available) that are designed to make you want more.
Going back to the times of Gordon Brown, he the son of a Methodist minister presided over an excess expansion of credit (other Chancellors and politicians are available..) that always struck me as enabling the poor in society to become (more) indebted.
Getting out of a minefield is tricky, takes patience, care and not a little hazard from those who try to help.
Tim,
Without people going into debt more, there would not be the money for others to save.
Without people having ‘ luxuries like new cars and new kitchens?’, there would be no new car manufacturers or kitchen suppliers.
You remind me of a twitter argument I had with a Tory who was talking about if everyone was able to save more for a rainy day, the government would’t be burdened when times take a turn for a worse.
You should look up ‘paradox of thrift’.
Richard,
Thank you for your reply. I’ve looked it up.. How interesting! I have much to learn, but it makes me nervous living in a world whose economics and finances I little understand.
T
Your suggestion is the right thing to do for now.
You only destroy economies when you DON’T do things like this.
Policy is all about cause and effect and for too long Government seems to be blind to many of the consequences of its decisions.
I’ve been waiting for someone to notice this! In all Europe the car leasing ‘market’ is most inflated in the ‘U’K and this is just another disaster waiting to happen. Your suggestion that a reshaped car market needs to emerge, unsullied by the SUV virus is also spot on.
It has long amazed me that no government has simply grasped the nettle by regulating the size (overall physical) and engines for private vehicles. The SUV plague, like those of Chelsea tractors, stretch limos, ‘super cars’ etc, were all ailments of which we had no need and should have been cut off at source by regulatory action decades ago – and I write as a life-long passionate fan of motoring. Never mind ‘incentives’ and ‘disincentive’ taxes – let us have these kinds of vehicular excess banned as the social and environmental plagues that they so obviously are. The savings in resources from their manufacture to the environmental damage which they do – from pollution to gobbling road-space – can be a not insignificant part of a much better post-pandemic tomorrow.
Richard, I would be interested in your thoughts on debt forgiveness. See https://www.marketplace.org/2020/04/02/covid-19-debt-jubilee-forgiveness-easing/
I can see a place for this but it will sure annoy those who don’t have any debts to be forgiven.
The difficulty is the balance sheets of those who do the forgiving: how do they stay solvent?
It may well come to pass, but we need to make sure we know how to do this and we don’t as yet
I have spent 90 minutes in a four-university call on this today….we’re working on it
Isn’t the answer the Chicago Plan, again? The government buys the private banks’ credit assets with an issue of its own loan stock. The government can take the losses on the debt, it is irrelevant.
But, to address Tim’s point, what would be fairer is for the government to nationalise the asset classed (or the value of the assets, in the case of land) underlying secured lending and replace the ownership with a right-to-use. So, everybody who bought a car on tick keeps their car and pays off the loan; everybody with a car receives the market price for it in cash (or near cash, i.e. government bonds). For land, everybody receives the land value of property, as compensation for a 100% land uplift value tax: if you owned it outright, you get a windfall of cash, if you have a mortgage you get it redeemed and if you are still underwater, the remaining mortgage is secured on the value of the buildings upon it. You can still make money developing property but only by doing precisely that and not speculating on an upward land price.
You know a bank does not have credit assets, don’t you?
Assets are debits
And I cannot see substitutions working, as yet
Tim, I’m not sure you are grasping the severity of this crisis.
If appropriate action is not taken (and right now, it isn’t), we are facing unprecedented levels of unemployment, both in the immediate term, and also once the movement restrictions are lifted.
We’re facing unprecedented levels of business failure.
Those two things combined will cause huge amounts of misery, and for debts to go bad. Which, in turn, will crash the banks.
Huge unemployment, economic failure, and anger fuelled by mass bereavement will likely lead to civil unrest.
It’s no exaggeration to say that societal collapse or violent revolution are on the cards. Not to mention conflict, as Mr Trump’s only way to deflect his huge failures over this crisis are to project blame externally, i.e. to China.
Strikes me as odd then, that you would think that we should be emphasising the need to protect savers. What value do savings have whilst everything else burns down around us?
* the above is a worst case scenario, but one which without adequate action now, is plausible, in my opinion.
Now is the time for the Government to urgently intervene to support businesses in the way that Germany has.
Introduce an immediate UBI for those below a reasonable income threshold. Suspend mortgage and debt payments, utility bills, taxes. The state can guarantee those for the lockdown period.
The Government needs to start its programme for employment and social reform, with immediate effect.
That means, at the very least:
– Green New Deal – on a scale bigger even that that proposed by Richard and co
– Significant expansion of public sector employment. Get people doing stuff, even if it is just maintaining streets, cutting hedges, cleaning gutters.
– Massive house building program
Otherwise we will be in the eye of the storm once the lockdown has been lifted.
Benzo
We are talking HIGE unemployment….
Staggering scales now
Richard
You discussed the problem with PCP/Leasing here: https://www.taxresearch.org.uk/Blog/2017/07/05/why-does-the-car-leasing-sector-pose-such-a-threat-to-financial-stability/
and again re falling second-hand prices: https://www.taxresearch.org.uk/Blog/2017/07/05/why-does-the-car-leasing-sector-pose-such-a-threat-to-financial-stability/
And now we have it ten times over
Hi Richard
I appreciate what you are saying here, and on the whole tend to agree, but looking longer term without car financing how do you propose people are going to make the wholesale transition to electric cars from combustion?
Of course in an ideal world people would use alternative forms of transport to the car, but that is not always practical nor reasonable to expect.
Also, I know there are companies already out there – for example Zip – for people that want access to a car but don’t want the hassle etc. of owning one, but again that is not a viable solution out there for a lot of people.
Cheers,
Robin
I am suggesting people will need to put up more of the money…
And that a system that encourages vehicles to be changed every three years is absurd
People will need more skin in the game …
That’s what resilience will require
Fair point Richard, but a lot people I know don’t have the money to stump extra. And that’s especially going to be the case after the situation now.
Therefore I don’t think it will be fair to ‘punish’ people in the future that don’t have the financial means to purchase an e-car, and continue to drive a combustion engine car.
So, we’ll see existing stocks go or longer until the transition occurs
That is actually quite green
Mass scarpping is not
benz0
Thank you for your explanation.
Tim
“the rash of wholly unnecessary SUVs tat are causing so much environmental damage. ”
SUVs are no more nor less environmentally damaging to the environment than other cars with similar engine sizes. Modern SUVs, which include electric of course, are more fuel efficient and cleaner than most cars built 5 years ago and than virtually all cars built 10 years ago (you’ve mentioned your car is very old and if so it will far more polluting than a modern SUV).
The SUV is simply a modern version of the old estate car. Are you condemning estate cars as well?
Is it that you just don’t like SUVs or that you don’t understand the modern car market?
The data does not support that
We should have seen a gain from efficiency
We haven’t because car weight has gone up considerably
That is why they are not like old estate cars
My point stands
We nursed a 2002 Audi allroad along until this year (bought in 2012) when it ungratefully died at Christmas. We felt quite virtuous in our old estate banger, among the shiny SUV types at the school gates. We then ran the total cost of ownership numbers on a similar replacement and realised that it would cost the same to buy a nearly new Q7, with better fuel economy and higher reliability. The Q7 achieves 25%-33% better mileage, despite being a 3.0 litre engine when the allroad was 2.5 litres, and it meets the last-but-one Euro emissions standard (god knows what its lean-burn engine’s NOx emissions are, though). Welcome to the SUV-dome.
I’m also a petrol head tho my cars are 10-45 years old. It’s unarguable that SUVS are substantially heavier and that has made a material difference to pollution. Yes engine technology has improved massively but the added weight and poor arerodynamics offsets those gains. Apply the same technologies to small light cars and the gains will be much greater. Then keep those cars longer and save the carbon from manufacturing the car in the first place.
The car lending scheme was yet another Ponzi bubble waiting to burst, encouraging people to drive around in flashier heavier cars than they need. Single people needing 1.5-2 tons to move around in. That’s before we talk about 10kg bikes… Yes the bubble needs bursting carefully, perhaps in a way that shifts the incentive to smaller electric vehicles, but burst it must
Robin
You get my points, precisely
The banks’ money has gone already. The question is whether they should take the seed corn for the recovery. They can cause far more businesses to fail, and will still make far less money from a wrecked economy. Lose/Lose.
I correlate new car and house buying sales to growth of inflated consumption as a principle indicator of the market economy as interest is compounded from the baseline demand of banks and undercut by the Bank of England to prevent overconfidence of market growth. Negative baseline interest rates to banks for reduced interested rates for mortgages and car loans to consumers , governments then subs vital structural assets, banks get indirect secured loans and hide away houses are banked for the middle classes wealth and cars for the dynamic slave job workers hand to mouth commuter social distance pod.