$5k Vouchers for Car Purchases: Utter Nonsense

Includes: F, GM
by: Markham Lee

Speaking of nonsensical proposals to encourage car purchases:

(From the WSJ): "The persistent slump in the U.S. auto industry promises to take center stage once again as car companies report January sales today, and the big question continues to center on what is needed to jump-start demand.

John Bergstrom, an auto dealer with a substantial collection of stores in Wisconsin, has a potential solution. Uncle Sam should dole out $5,000 discounts.

“If the government, manufacturers, the financial institutions, and the dealers all work together, we could give our economy a huge positive jolt,” he wrote in a letter to President Barack Obama late last week. “If for 90 days, February 15 through May 15, everyone who purchased a new vehicle in America (no matter where it was built) will be given a government voucher for $5,000; and the manufacturer would match it with another $5,000 voucher…we could get this industry rolling again in a hurry.”

Mr. Bergstrom’s plan assumes that dealers would agree to sell vehicles at the invoice price, and that auto finance companies would finance qualified buyers with a 72-month loan at a 5% interest rate. “We could eliminate the stranglehold inventories of new vehicles piled up across the country, and we would generate new vehicle orders…

...The initiative has generated some support among Mr. Bergstrom’s peers in the auto retailing sector, but it would be costly. In order to get sales back to a more robust level — 15 million annually — or nearly 4 million sales during the three-month period in the plan, the government would need to spend about $19 billion, and the auto makers would need to match with $19 billion in discounts.”

In all honesty I would normally ignore something like this but considering some of the proposals that are floating around congress, I think I have to take this seriously as this proposal doesn't seem so far-fetched anymore.

However when some car dealers are already offering cars at 50% off, selling cars at $10k less than invoice isn't that much of a deal anymore (if at all). Not to mention the fact that heavy discounting and incentives didn't exactly prevent Detroit from losing money during the credit boom, which suggests that it's unlikely to show positive dividends now.

But aside from the specifics of the proposal, it's really more of an example of how disconnected some in the auto industry are from the financial realities many households are dealing with. While some are trying to portray the decline in car sales as being merely due to a loss of confidence and tighter credit standards, the real truth is that consumers are pulling back for some very valid reasons and their loss of confidence didn't occur in a vacuum.

There is nothing the government (or automakers) can do to give people confidence, when the reason they've lost their confidence is rising healthcare costs, strapped budgets, high debt loads, and risk of job loss (if they haven't lost them already). Not to mention the fact that banks are no longer able to originate auto loans that enable people to spend above their means, an ill-advised practice in the first place.

I think automakers, industry leaders, politicians, etc, need to wake-up to the fact that many consumers have decided to make decisions that are in their own economic best interests, as opposed to the interests of those that want them to spend their households into financial oblivion.

The way to save the economy is to figure out a way to adjust to being a nation of savers (or a nation that saves more at least), as opposed to trying to figure out how to make bad financial decisions.

You can read more here.


The WSJ: "Dealer Suggests $5,000 Government Vouchers To Boost Sales" -- John D. Stoll, February 3, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.