A lot of readers are interested in the subprime loans situation. Most of the attention has been on how low-quality loans in the housing sector have created a massive bubble (for those of you who missed it, be sure to take a ride on the housing bubble roller coaster) and the consequences of that bubble for the economy. No doubt there's much to worry about there. But the question of bad loans is actually much bigger than that. Easy credit and questionable loan practices affect all segments of the economy. For example, even Harley-Davidson (NYSE: HOG) is having trouble with bad loans. A recent article on TheStreet.com took a look at loans made by the HOG, and it's not a pretty picture. Harley has a credit subsidiary, HDFS, which makes about half of the loans to new customers. Delinquencies on loan payments at HDFS are on the rise. In the first quarter of 2005, delinquencies were 3.6% of outstanding loans. By the fourth quarter, delinquencies had risen to 5.18%.
This increase in delinquencies looks a lot like the situation in the mortgage market. And just like mortgages, loans made by the HOG are packaged and sold to investors. So bad loans will hurt more than Harley. They will also have a negative effect on the investors who have made bets on the ability of American consumers to pay for the expensive toys that clutter our garages. (That raises an interesting question: what percentage of Harleys are used for basic transport and what percentage are used just for fun?)
The basic picture is the same, though. Trying to keep the consumption machine going over the last few years, companies (following the Fed's lead) used easy credit to hook consumers who probably shouldn't have been buying expensive things with long term loans. Whether it's housing or motorcycles, the lesson is the same: excessively easy credit is costly in the long run.
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