Ben Bernanke’s successors at the Fed and other global central banks still don’t get it.
Falsified debt prices do not promote macroeconomic stability. They lead to reckless credit expansion cycles that eventually collapse due to borrower defaults. We’re now seeing that play out in the auto sector, especially since anyone who can fog a rearview mirror has been eligible for a car loan or lease.
If that reminds you of the sub-prime housing disaster, you’d be right.
That, in turn, will make the looming collapse even worse, due to the sudden drastic shrinkage of credit in response to escalating lender losses.
How did we get here?
Let’s start by looking at the Fed. Its reckless monetary reflation cycle in response to the Great Recession caused auto credit, sales and production to spring back violently after early 2010.
Accordingly, that reflation has powerfully impacted the growth rate of total U.S. domestic output. And it’s had a massively distorting effect.