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‘Cash for Clunkers’ Comments and Questions

Posted by Larry Doyle on July 31, 2009 2:51 PM |

Uncle Sam just spent $1 billion via the “Cash for Clunkers” program over a 4 day time frame. Given the speed of that burn rate, The Wall Street Journal reports, House Votes to Extend ‘Clunkers’ Program.

A few questions and comments:

1. The National Highway Traffic Safety Administration is overseeing the disbursement of these funds. Think there may be a chance of some kickbacks or fraud going on here? Who is checking?

2. Assuming the average list price of the fuel efficient vehicles being sold is $20k, the subsidy of upwards of $4500 is approximately a 20% discount. Is this a true reflection of latent demand or partially a reflection of consumers responding to a gift?

3. What does this program do to the used car market? If I am in the market for a used car, my bid just went down at least 10% if not more.

4. How does this program affect the less fuel efficient car market? Does it strip demand away from that segment?

5. If there is such demand for the Cash for Clunkers program, should there be further restrictions on who may be able to benefit from this program going forward?

6. Given the speed with which the initial $1 billion was utilized, do you think there is a chance car dealers are working other deals with customers?

Not to be overly cynical, but as an industry car dealers do not exactly enjoy the best reputation. As such, while Congress can approve more funds, I would like to see a thorough audit of this program prior to the actual allocation of those funds.

Thoughts and comments welcome.

LD

  • Jack Call

    Larry,
    #2. Sure there is an element of a “gift” here. Perhaps more importantly, there is a strong element of pulling demand forward.
    #3. You won’t buy if you do that. The clunkers program cars from the supply chain, i.e., there is less to buy, new or used. The dealers actually have to pour liquid glass into the engine to prevent it from ever running again according to a dealer with whom I spoke yesterday.
    #6. Yes. If the manufacturer is offering $X off, buyer gets an even lower price.

  • jus

    It doesn’t matter if they dole more money. They problem is still the backlog. Read this article: The Real Reason for the “Cash for Clunkers” Suspension. The ex car salesman blog shares exactly why they stopped the program. Even reports that some sales managers are calling asking for the money back because they were denied the rebate when the final paperwork was submitted but their car was already ruined by dumping a solution in the engine. They now have no car. Scary. See: http://tinyurl.com/ml9sdo

  • kbdabear

    A few observations:

    Isn’t this just creating a quickie Christmas, creating a quickie booster shot of demand that won’t be sustained? Will demand drop off a cliff once everyone qualified, interested, or still in the market takes advantage?

    Why were the buyers still holding onto old cars? No doubt for starters they were paid for. Now they’re assumed new debt that they might not be able to handle. We’re only a few months out of “your payments will be suspended for a year if you lose your job” promotions.

    This time of year usually has a higher interest due to markdowns to make room for new models. Will demand for the new models fall off because people already bought all at once?

    This is basically giving some reprieve to distressed dealerships much as Christmas shopping season does. A big ramp up in December sales doesn’t translate into a linear boom for the following months.

    Will the consumer cut spending on other items in order to buy a car sooner than they wanted, or in pursuit of the one time bargain?

    Is the $4500 rebate being used as a markdown in price or in lieu of a down payment. Could be a micro subprime issue with many of these sales.

  • kbdabear

    The Clusterfark of the paperwork confirms a personal creed that all should adopt;

    kbdabear’s rule: “Any government program, even if conceived by geniuses, will be administered by morons”

  • kbdabear

    Just my opinion, but I think a better plan would have been

    Have the car buyer apply for a voucher for $4000 to be used towards purchase of a new car following the mileage guidelines

    Provide a second voucher to be paid to the buyer for $500 or $1000 to turn the old car over to a salvage yard.

  • getfitnow

    I heard the rebate goes to the dealer, not the buyer. And there’s a backlog on getting approvals/rebate.

    Who’s approving these contracts–the government?

  • Aaron Kramer

    Subsidies never create demand they just pull demand forward. If a subsidy is in place for an extended period of time it will drive prices down. This process is like a real estate developer buying down a buyer’s mortgage and it is also quite deflationary. This is nothing more than a big time bailout for Government Motors, the auto sector as a whole and the UAW. Why are we subsidizing the destruction of perfectly good cars? Good Parts for used cars? You don’t do anything for CO2 consumption by producing a new car that gets moderately better milage. The so called carbon footprint is enormous when you consider the delivery of the inputs and delivery of the final product. What a JOKE!

  • kbdabear

    I heard the rebate goes to the dealer, not the buyer. And there’s a backlog on getting approvals/rebate.

    That’s who the rebate goes to. It’s creating a cashflow crisis for many of these dealers, many who can’t pay their operating costs even though their lots are busy. A laughable point in the NY Times says that according to the government, the dealers should be reimbursed within 10 days of approval. Many who work with government accounts on their accounts receivable ledger will tell you that payment in 3 months is considered fast. Six months is common. Cash flow problems will ruin even a popular sales drive, but lifelong politicians and bureaucrats do not have a concept of cash flow.

    Meanwhile, the dealer also has to disable the car with the sodium silicate solution on their own premises. Hazmat lawsuits will no doubt be filed soon, or even orders from local or even federal EPA administrators to cease and desist until an approved disposal method is in place, the costs of which will of course be borne by the dealer.

    The salvage yards are also putting a big thumbs down on CARS, as resale of used engines is one of their few high margin businesses.

    • Larry Doyle

      kbdabear….Thanks for this color as well as the prior color. All very much appreciated.

      My immediate question and one raised by many others, “if this is how Uncle Sam allocates and manages a $1 billion program with heavy public participation, what about health care?”

      You know that question is running rampant through our country this very moment.

      • kbdabear

        Thanks Larry..

        With the emergency addition of 2 billion dollars more into the program, and with the shaky finances of some, this is starting to get the nickname “Fannie Mae on Wheels” around the intertubes.

        • lizzy

          Not just Fannie Mae on Wheels, but on racing slicks going for a land speed record at the Salt Flats.

  • kbdabear

    Let’s say I’m the car buyer turning in a 95 Ford Explorer. I’ve determined that the vehicle will not bring $4500 on resale or trade-in.

    The vehicle however is still reliable transportation and it’s paid for. I only have to put liability insurance on it and pay a lower yearly registration fee.

    I’ve held onto the Explorer also because I’m trying to keep my DEBT at a minimum and paydown others. I can no longer get that home equity loan to consolidate debt or buy a new car.

    Now I’ve taken on a monthly obligation of 300 to 500 dollars a month in car payments, I now have to pay also much higher insurance premiums because a financed vehicle must have collision and comprehension on it. If you’re paying 50 a month on the old vehicle, say hello to 200 a month in premiums.

    So someone who now has at least 500 dollars a month in new debt obligations, is he going to cover his mortgage when local property tax hikes raise the payments or variable interest kicks in again? Will he have the money to buy a new tv or clothes, or take a vacation to Vegas?

    Remember, you can analyze bits of the economy just by looking at your own situation or the situation of everyday folks around you.

    • Darryl

      Good common sense. I see it the same way. It looks as if most Americans have learned nothing during this
      recession. Still the same old America, buy what you can not afford. If most states are in double digit unemployment
      then how do all these people pay for new cars. Am I
      missing something here?

  • kbdabear

    If you’re a lover of Volvos, do not click on this link as a perfectly good 2001 Volvo S-80 with 90K miles on it. The engine took 5 minutes to seize up and also catch fire.

    Wholesale auction value on the car was 4200, the owner probably could have gotten 5000 with patience.

    http://www.youtube.com/watch?v=waj2KrKYTZo

  • Larry Doyle

    kbdabear….as i watched this video, it hit me that this Cash for Clunkers is a “value destruction” to “‘make work” program.

    To think that it will be accounted for as an addition to GDP along with a benefit to the economy is perverse.

    Thank you again for enlightening all of us.

  • Darryl

    I believe that dealers seeing the wild response to
    this are jacking up prices before the buyer gets there
    In the end even with the rebate the dealer makes out like a bandit and the buyer obtains a net gain of zero. If you really want to buy a new car wait until all this foolishness is over and then see what kind of deal you can get as no one else wil be buying.






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