Car crash

Back in April, when Theresa May called a snap election, she sparked a storm of speculation about her reason for going to the polls some three years early. This was a particularly big deal, because in order to hold a vote on 8 June as intended she would have to circumvent the Fixed-term Parliaments Act 2011. Which she did with an alacrity which made a mockery of the legislation. But she had a working majority in the House of Commons and seemed to be under no particular pressure. Or, at least, none that would explain such a dramatic move. Pundits and punters alike were understandably perplexed.

The justification May gave was some vacuous waffle about the nation needing certainty, stability and strong leadership following the EU referendum. Apparently, there was a need to heal “divisions at Westminster”. Which, itself, seemed a bit odd – not to say ominous – since parliamentary divisions are one of the ways in which the British political system most convincingly imitates a properly functioning democracy.

Not a few of those pundits and punters were surely struck by the disconnect between May’s stated motives and the fact that, if one were looking for a way to create uncertainty and instability while demonstrating weak leadership, calling a snap election would be somewhere near the top of your list.

Then there was the stuff about strengthening her… sorry! the country’s hand in the Brexit negotiations. Which was, and remains, palpable nonsense. The EU negotiates with the UK Government. It doesn’t matter a toss to them what the hue of that administration is, or what the parliamentary arithmetic might be. The government is the government. Voilà, c’est tout! As one can hardly imagine David Davis saying.

The reasons offered for calling this snap election could, if we were being kind, be characterised as implausible. Lacking the necessary generosity of spirit, I’m obliged to describe them as a load of shite.

It could be argued that ‘reason’ is an inappropriate term in this context. It is entirely possible that ‘reason’ had absolutely nothing to do with it. We must accept the possibility that this was not a considered action based on some rational assessment of the situation. Perhaps no reason is better than a bad reason – to coin a phrase.

But to dismiss the calling of the snap election as an act of political madness would be to deprive ourselves of the simple pleasure of idle speculation over the thinking behind it. A pleasure which I indulged – some would say over-indulged – when I suggested that May’s move might actually have been more clever than it looked.

What if she was not thinking about the situation as it was at the time? What if she was looking ahead? What if this was not about holding an election in 2017, but avoiding an election in 2020?

What, I wondered, if May’s advisers had warned her of some impending problem which would make 2020 a very bad time to hold an election – from her party’s perspective, of course? Getting fully into my speculative stride, I began to think about what sort of problem might be so serious as to warrant taking such trouble. It would have to be something big. Almost certainly something to do with the economy. Something of the order of the 2007/2008 financial crash.

Was it possible that May had been given a timely heads-up about some unexpected and entirely unforeseeable failure of the economic system championed by her party? Was this why she so desperately wanted to avoid an election in 2020? If so, what is the exact nature of this next in as decades-long series of one-off, unique, unrepeatable and entirely unconnected catastrophic failures?

My mind turned to bubble cars. No! Not bubble cars! Car bubbles. More precisely, car finance bubbles. Bubble cars were an earlier generation’s way of making motoring affordable. As demand for cheap personal transport soared across Europe in the 1950s and 1960s a solution was found in easily manufactured, low-cost, one- or two-seater, cute as a button and not much bigger cars such as the Isetta, the Trojan and the Messerschmitt.

Jump ahead a decade or two and a new solution had been found. Instead of offering those who wanted a car vehicles they could afford, The Market made it possible for them to afford the car they wanted. Hire Purchase, or ‘The Never-Never’ as it came to be known, allowed consumers more immediate gratification by letting them buy now and pay later. Or, to inject a bit of much needed cynicism, it allowed car manufacturers to sell more cars by letting financial institutions take a cut of the loot.

Fast forward to the present day and the financing schemes have become vastly more sophisticated. So sophisticated, in fact, that some are really understood by a sole mathematical genius who is currently to be found scribbling meaningless strings of algebraic symbols on the institutional green walls of a locked room using his own faeces.

The thing that might have scared Theresa May into calling a snap election is debt. Debt so huge and unmanageable as to threaten the entire global financial system. Sound familiar? That’s because the debt bubble being created in the car market is chillingly reminiscent of the housing debt bubble that burst around a decade ago triggering an economic earthquake whose after-shocks are still being felt today.

Ever the ones to come up with names for their complex ‘financial instruments’ which tread a tenuous line between reassuringly scientific and comfortingly comprehensible, the industry calls this ‘Never-Never’ on steroids ‘personal contract purchase’, or PCP. (Not to be confused with that other PCP, a drug called phencyclidine, known among recreational users as angel dust. Which may well be less harmful than the PCP we’re discussing.)

PCPs are a cross between a loan and a lease. The buyer pays a small up-front deposit followed by monthly payments for a contract period which is normally three years. When the contract expires, the buyer has the option of either handing back the car and getting a new vehicle with another personal contract purchase plan, or buying the car outright. It’s not dissimilar to the way many of us upgrade our phones. Except the sums of money involved are very much larger.

How much larger? Car sales in the UK are soaring in a way that is superficially something to celebrate. But 90% of those sales are financed using PCPs. In 2015, UK households took on almost £32bn in debt to upgrade the family car.

The combination of a prolonged period of exceptionally low interest rates and stagnating earnings has created a powerful incentive for both lenders and borrowers. As we should have learned from past experience, but evidently haven’t, these are the very conditions which encourage mis-selling.

There are other thorny snags on the miracle money tree of PCPs. All that debt is secured against a rapidly depreciating asset. And, in one of those vicious cycles that our economic system seems so adept at creating, the number of second-hand cars flooding the market as people upgrade more often further depresses prices.

Just as with negative equity in the housing market, someone who gets into financial difficulties – perhaps because the zero-hours contract that should have disqualified them from getting a loan but didn’t because the guy arranging it did them a ‘favour’, actually turned out to mean zero hours – they can be left with no car and a massive debt burden. And, just to make the situation even more like an Escher drawing brought to life, the repossessed cars add to the glut of used vehicles coming on the market.

It looks very much like a system designed to force borrowers to default on loans. If a sufficient number of subprime car loans go into default, the market is likely to react by going into full panic mode. Of course, the bankers don’t pish their pants, they pish ours.

Although the sums of money involved (£32bn) seem scarily huge to us, in the grand scheme of things they are relatively small. It is unlikely that defaults on PCPs alone could cause a financial crash such as was occasioned by the bursting of the subprime property bubble. But, as with mortgages, subprime car loans are being bundled with other loans in what are called asset-backed securities. (See what I mean about the finance industry’s predilection for euphemism?)

Also, car debt is but a small part of overall consumer debt in the UK, which the Bank of England estimates to be standing at around £200bn. The concern is that the precariousness of subprime car debt may foreshadow a much bigger problem.

You can surely see where this is going. And if you can see it, so can those around Theresa May. After all, they have access to more and better information than most of us. If they reckoned the PCP bubble was due to pop in late 2019, they might well consider it a good idea to avoid an election in 2020. All they had to do then was think up some excuse for calling a snap election. As we saw earlier, that didn’t work out too well for them. But it all makes my speculation look a lot more credible than their explanation.

I’ve run out of space now. Which is unfortunate. Because I really wanted to work in something about car crashes, air-bags and Boris Johnson. Ah well! Maybe next time.

Article first published in the August edition of iScot Magazine.

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6 thoughts on “Car crash

  1. Alasdair Macdonald

    To be able to override the Fixed Term Parliaments Act, the Government had to have the support of the Labour Party, or, at least, a substantial chunk of it. It received this support, which many, including me, considered to be foolish. The Labour Party was well behind in opinion polls, indeed, threatened with a wipe out in Wales, and its leader was loathed by a majority of the MPs. So, why did the Leader and his few supporters and so many of his foes within the PLP do so?

    Events proved them to have been partly correct, but it is very unlikely they could have predicted this.

    They could simply have abstained and tabled a vote of ‘no confidence’, which, in normal circumstances, would have failed, but, if Mrs May wanted an election her party would have had to support a motion of ‘no confidence’ in her Government. Would that not have been a delicious prospect for those of us who loathed the government? But, for Labour, would it not have given it an immediate tactical boost – a government seeking re-election having been turfed out by its own party? Of course, the msm would have spun things furiously to mitigate this, but only the most gullible or partisan of the electorate would have accepted this.

    Notwithstanding the concerns about burgeoning debt, I do not think it entered Mrs May’s head as a factor. I think she is instinctively authoritarian, opposed to democracy, unable to cope with debate or even countenance other possibilities. I think the eavesdropped conversation between Messrs Ken Clark and Malcolm Rifkind encapsulated her personality, attitude and intellect very well. She felt that she would gain untrammelled power through the ballot box, like her ally, Mr Erdogan, in Turkey. It was hubris.

    It still does not explain the position of the Labour Party.

    It had the beneficial effect of arousing interest in politics in the young, who voted in far greater proportions than my mainly curmudgeonly septuagenarian contemporaries.

    Had Mrs May had any ‘hinterland’ or interest in anyone other than herself she might have mused on the words of her predecessor, Mr Harold MacMillan, “Events, dear [girl], events”.

  2. SandyW

    Just to add to the prospect of those cars becoming valueless as assets to back the debt is the prospect of electric vehicles gaining market share and becoming the vehicle of choice for new purchasers. EVs have very many fewer parts than petrol or diesel cars and, although more expensive to purchase up front, can last almost indefinitely (the part most likely to succumb to wear and tear on an EV is the tyres, contrast that with the clutches, gearboxes and flywheels that wear out on conventional cars).

    People write off the prospect of mass take up of EVs as being something that will only happen in twenty or thirty years time. Look back at some pictures of city centres from 1910 and 1920. Notice a contrast? The first will be full of horses with carriages, the second will have none. Technological change can be rapid, more rapid than people expect. You might very well be onto something here, with your reasons for the Tories wanting to avoid re-election in 2020, Peter.

  3. William Ross

    Interesting post Peter, but I am sorry to say that I cannot agree with you on this one.

    As another correspondent above noted, May complied with the Fixed Terms Act perfectly. Labour supported her.

    Put yourself in Theresa shoes in April 2017. There are several good reasons why she would have gone for the snap election ( whatever she may have said). I am sure that I would have done the same thing. Why?

    Firstly, there was the chance the thrash Labour and probably the SNP. Labour was torn apart by infighting with a weak far-left leader. The SNP were in the doldrums, and Ruth no doubt advised that headway could be made in an anti-Indy ref 2 campaign. A victorious election would cement Theresa`s position as Prime Miinister and cripple the Opposition. Secondly, you are quite wrong to think that the EU will merely negotiate with any government no matter its internal strength or weakness. In fact the EU is a ruthless negotiator and will search for any weaknesses. In this respect, can I recommend that you read Varoufakis`s recent book on this tribulations negotiating the Greek bailout with the Troika ( Commission, ECB and IMF)? Varoufakis was beaten into the ground by every dirty trick conceivable. The book is called ” Adults in the Room: My Battle with Europe`s Deep Establishment”

    National and personal debt is at an eye watering high it is true, but the key question is what are borrowing levels versus our GDP? By this measure, we are still not in danger of bankruptcy. I have been surprised that so much quantitative easing has had so little impact on inflation.

    Regards

    William

  4. Hugh Wallace

    Your predictions of economic ruin arising from the car loan bubble bursting may well turn out to be highly accurate but I think you give far too much credit to the Tory party & their advisors. That lot can’t see as far ahead as the tips of their noses. Look at all the Brexit ‘negotiations’ as an example.

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