I have great respect for Larry Lindsey of The Lindsey Group and as you know, that is a hard thing for me to say about most economists. He has more vision and accuracy with his forecasts than anyone else I can think of. Larry was on CNBC this morning and discussed the risks in the automotive credit market(click here). Many people seem to believe that the credit market problems primarily have to do with subprime mortgages, CDOs and associated crappy derivatives. That is a simplistic and dangerous assumption. While it is getting most of the attention, subprime is the priority because it was first to go and because it involves the house component of the American Dream.  But remember that average Americans usually have two big assets - their house and their vehicle. For many renters, their car or truck is it.

I tried to call attention to this issue 6 months ago when I wrote about Subprime Auto Loans, but this topic has largely been ignored until now. As Larry said this morning, the majority of car sales are financed and that financing is heavily involved in the securitization process. The similarities between where we were a year ago with the emerging mortgage crisis and where we are today with automotive credit are very scary. Much of the subprime mortgage mess was created when all the deal terms were determined by the payment amount. It didn’t seem to matter what kind of house you needed, you got the one that fit with your payment. Hearing about the increasing prevalence of car loans being stretched out as far as 8 years to reduce the payment and move the inventory should ring some bells.

Politically and economically, the two biggest industries I can think of are home construction and automobile manufacturing. Evaluate the efforts our government has undertaken to bail out the housing and mortgage industry and then throw in the impact of union involvement in the politically charged automotive industry.  It’s one thing to foreclose on someone’s house, but they have an option to return to renting for their shelter. It’s another thing to repo someone’s car.  Are they going to walk to work, ride a bike, carpool, take mass transit?  As the recession takes hold, auto delinquencies are rising and they will get worse.  As people lose their jobs, they will lose their cars.  As people lose their cars, they will lose their jobs.  Somewhere down the road, investors will evaluate the tranches of defaulting auto receivables in various Asset-Backed Securities and we will revisit the problems with the commercial paper market and CDOs.  In some ways, it’s already happening(Click here).

It will be interesting to see what kind of government program will be set up for the automotive bailout.  They are going to need a pretty big parking lot to hold all that collateral.