The Illusion of Wealth Is Going Away

In the last few days, all of the American car companies have announced that they are either getting rid of or really cutting back on their car leasing programs. And the other financing companies are also announcing the same. From Bloomberg News:

JPMorgan Chase & Co., the second-largest U.S. bank by assets, will stop offering automobile leases for Chrysler, Dodge and Jeep brands as of Friday, the same day Chrysler LLC’s finance unit ends its leasing program.

The bank will continue a separate program that provides leasing on Subaru-brand cars since Chase is the first-choice provider for the Japanese manufacturer, said Christine Holevas, a spokeswoman for the New York-based company.

Chrysler Financial said last week it would no longer offer leases after lenders began charging interest rates too high to make leasing a sensible option.

Leasing used to be a money maker for the companies, especially as their finance divisions reaped the benefits of the interest payments. The cars were then resold at the end of the lease.

But now, they can’t resell the cars. If you have a leased SUV and you turn it in, the car company is likely going to have to eat the cost of that automobile because no consumer wants it.

Ford just took a $2.1 billion write down on losses on leases in its financing arm.

Leasing, however, afforded regular consumers the chance to “own” a car they otherwise would not be able to afford. With little money down, most people could drive out of a car lot with a Cadillac, a Beemer, even a Mercedes and pay a reasonable monthly payment for three years.

It gave the illusion of wealth. Others had no idea you didn’t own the car and were simply leasing it.

So millions of Americans drove “luxury” cars through leasing.

Same way they “rented” houses from the bank they couldn’t afford (through the 100% financing, no money down mortgages). Same way you can “rent a purse” through the websites that charge you a fee to walk around town with the Gucci or the Prada for a week (as portrayed in the recent S*x and the City movie.)

It’s All an Illusion

It’s all fake. There is no wealth underlying these purchases.

And that’s the problem in America right now. The country’s “wealth” is all an illusion. We can’t really afford the luxury items most of us buy. But we’d like others to think we could.

I’m not advocating a return to the strict class distinctions that marked America in the 1900s (where the rich truly DID live in separate neighborhoods and where the kind of car you drove said everything anyone needed to know about the person.)

But it’s also not healthy, as a country, to live beyond our means.

I’ve long said that eventually we’ll return to actually having to save money to buy the luxury items we want. It will be a structural shift in American society when this realization hits the consumers.

Maybe, when they walk into the auto showroom and can’t walk out with a leased car, it will finally hit them.