Cash for Clunkers: Sham Du Jour

Looks like the Fed's “Cash for Clunkers” policy has stirred some pretty dramatic demand for new vehicles spurring on the second largest month-to-month production jump in vehicles in nearly 40 years.

While I recognize the novelty of the “Car Allowance Rebate System” policy, I’m more than a bit skeptical of its overall utility and simply appalled at the thought of thousands of Americans queuing up for their government auto allowance.

Oh how the mighty have fallen.

One day the force of impulsive and mindless debt fueled conspicuous consumption and class conceit are driving widespread demand for the biggest baddest Hummers and SUVs. The next, a modern day bread line of busted households and their two bit jalopies feverishly racing to lock in a chance at a 5% discount on a Toyota (TM) Corolla.

I can’t speak to how this policy will affect environmental issues, I’m no expert, though I’m surprised that the requirement was only 22 MPG for the newly purchased vehicle. Possibly U.S. automakers would have few eligible products if it were higher.

On a side note, as a former Prius owner (cracked mine up unfortunately) I can attest to the fact that the car is solid. Fill it up, drive it and you get 45 miles per gallon. Also it’s worth mentioning that it withstood quite a pummeling from the likes of a Ford (F) Econoline. Yours truly walked away with just some minor flesh wounds - the car wasn’t so lucky.

As for the effect on the economy, it’s another fraud.

Moving 2010 and 2011 auto purchases into 2009 is clearly providing a short term economic pop but in the long term there is likely no extra demand being created so I would expect the trend of weakness in autos (as seen in the production data chart below) to resume once the policy expires (or sooner).

Washington elites are likely all aglow over the “success” of the clunkers program and certainly those with auto and environmental interests are equally proud, but where does this type of thing end?

Cash for McNuggets, Cash for Marlboros, Cash for Johnny Walker…

What we have now in America is Keynesianism gone wild, a belief that through gimmicks, tricks and government handouts you can jumpstart and even remedy an economy that’s writhing on the down slope of multiple decades of serious economic distortions. As if more distortions are all you need to repair all the prior distortions.

They claim it worked in 30s, I suppose now the issue will be settled once and for all.

click to enlarge

Comments

[a. palmer jr.:]

I have to assume that most of these cars were bought on credit. Our problem, what it all boils down to, is too much debt (credit). So I don't see how increasing debt is going to solve our debt problem. Who's to say that some of these cars won't be repossessed when the buyer loses his or her job? More bad debt for the issuers.

Aug 16 08:55 AM

[Old Trader:]

a. palmer,

Fwiw, I've heard (quotes from various auto dealers), that the "quality" of the buyers (as measured by credit worthiness) is actually pretty good, so this might not be as big a problem as you suggest.

Aug 16 10:09 AM

[mitchalex:]

What happens after clunkers is gone?? I think the auto industry will be right back to a low share price not a positve.
Why can't they make new cars every 5 years instead of just changing the trim they could actually make a better car.Might even be cheaper that way

Aug 16 10:31 AM

[User 472219:]

As a retired banker, I tend to agree with a. palmer jr. Lots of lower income folks drive "clunkers" that are paid for. When the fearless leader offers $4,500.00 for that old pos, these folks might be tempted to jump on the wagen and grab a new car along with a new debt. What happens when the new debt causes financial problems and the lender repos the new car? Now no transportation means no way to get to work (if working) and the snowball begins all over again. Good idea?! I'm not so sure.

On Aug 16 08:55 AM a. palmer jr. wrote:

> I have to assume that most of these cars were bought on credit. Our
> problem, what it all boils down to, is too much debt (credit). So
> I don't see how increasing debt is going to solve our debt problem.
> Who's to say that some of these cars won't be repossessed when the
> buyer loses his or her job? More bad debt for the issuers.

Aug 16 10:48 AM

[FDNY RET:]

What is it about the word "Alternate" as in "other than petroleum powered" that fails to resonate??.

Anyone who thinks moving up from 18 to 22mpg is going to grow the leaves on the trees for the next 5 years-(life of the car)-is delusional. This gain will be surpassed by Chinese and Indians moving up from bikes to scooters in the next three weeks.

We'll make a serious effort when feet, bikes and trains are the three last choices.

Aug 16 10:52 AM

[ex GM emp:]

Another clueless, probably never worked a day in his life, commenter. It's the economy, STUPID!. Get those car factories humming again and get this economy moving. I guess you want all those laid off auto workers to stay laid off or work at China-Mart for the rest of their lives. Talk about class envy. You got it bad brother.

Aug 16 11:04 AM

[john s. gordon:]

your picture - not very many of these 1950 desotos around anymore.
> jack

Aug 16 11:16 AM

[User 20528:]

It's a Chrystler dude!


On Aug 16 11:16 AM john s. gordon wrote:

> your picture - not very many of these 1950 desotos around anymore.

Aug 16 02:10 PM

[DavidR:]

An observation from the front lines with an attempt to be neutral.
1. A person who previously couldn't afford a car loan is no closer to buying a new car just because they have $4500 of down payment "handed" to them. They still aren't able to get a car loan on low income. The lenders are being as strict at underwriting car loans as they were three months ago.
2. There are very many frugal people with good credit who drive 10 year old SUV's because that SUV is paid for. They have justified the extra expense of poor fuel economy for the trade off of no car payment. Those people CAN get credit, and recieving $4500 for their 150,000 mile $500 Explorer is hopskotching them OVER buying another used car and into a new, fuel efficient (by comparison) car.
3. The nearly instantanious removal of 750,000 older, high mileage Explorers, Grand Cherokees, MiniVans, and 1/2 Ton pickups from the pool of available used cars is having an upward pressure on used car values. Even people who have cars worth more than the $4500 threshold are benifiting from this upward movement in trade-in values when they trade up.
4. The mindset that current new Ford/Chevrolet/Dodge cars are less fuel efficient, or of poorer quality is false, and based on the fact that 15 years ago, they were of lesser quality. Removing 750,000 reminders of past manufacturing sins from the automotive pool will have an almost instant effect on the perception of CURRENTLY available vehicles. Bringing perception into line with reality will improve the prospects for future sales and profits.
5. Current sales are depleting inventory. The rebuilding of inventory is usually the first step in economic recovery. Momentum is a powerful force.

Aug 16 03:46 PM

[yeoldgrump:]

I've never owned a new car. I buy a car that has less than 60,000 miles on it and drive it about 9 or 10 years. It usually ends up with around 150,000 to 190,000 miles on it. I pay about 1/2 what you would pay for a new car and get just as much use, if not more, out of it as the person who bought a new car. The cars I have now do not qualify for the "cash for clunkers" program because they get 26 mpg or better. I have a 1975 Ford F250 pickup that gets 9 mpg. It does not qualify because it is too old. (I thought the idea for "cash for clunkers" was to get the gas guzzlers off the road. A new Ford F150 can haul the same as my old truck and gets 21 to 22 mpg. I would consider the old Ford a definite gas guzzler.)

Aug 17 03:29 AM

[root66:]

I started to ignore what I was reading with your misstatement about domestic mileage. You lost me completely when you started gushing about the wreck of your Prius.

This is just several paragraphs of incoherent rambling. Don't quit your day job, or at the very least, compose these things before heading out for a night on the town.

Nice title though.

Aug 17 06:46 AM

[Judester:]

I've got one for you - a 1990 Plymouth Voyager Minivan with over 170,000 does not qualify for cash for clunkers, go figure. It does not meet the minimum miles per gallon. However, apparently some 2006 models do qualify, like a Porsche 911 or a Ford Expedition. Unfortunately, the age of the vehicle was only taken into account in the wrong direction. The car should have been required to be a certain number of years old and/or a minimun number of miles. I think we can all agree, the older the car, the more miles on the car, the more the car is a "clunker." Do they really think that a 1990 minivan still achieves its rated MPG? What about the emissions of an older vehicle or the fluids that invariably leak from an older vehicle? Isn't that harmful to the environment?
I think they really missed the mark on this one. It's not so much a deal to help the environment so much as it is a second bailout of the car industry, where a few lucky people get a great deal on a new car.

On Aug 17 03:29 AM yeoldgrump wrote:

> I've never owned a new car. I buy a car that has less than 60,000
> miles on it and drive it about 9 or 10 years. It usually ends up
> with around 150,000 to 190,000 miles on it. I pay about 1/2 what
> you would pay for a new car and get just as much use, if not more,
> out of it as the person who bought a new car. The cars I have now
> do not qualify for the "cash for clunkers" program because they get
> 26 mpg or better. I have a 1975 Ford F250 pickup that gets 9 mpg.
> It does not qualify because it is too old. (I thought the idea for
> "cash for clunkers" was to get the gas guzzlers off the road. A new
> Ford F150 can haul the same as my old truck and gets 21 to 22 mpg.
> I would consider the old Ford a definite gas guzzler.)

Aug 17 05:37 PM

[billddrummer:]

On Aug 16 08:55 AM a. palmer jr. wrote:

> I have to assume that most of these cars were bought on credit. Our
> problem, what it all boils down to, is too much debt (credit). So
> I don't see how increasing debt is going to solve our debt problem.
> Who's to say that some of these cars won't be repossessed when the
> buyer loses his or her job? More bad debt for the issuers.

Two thoughts on C4C:

The first is related to this post. The first wave of buyers were people with good credit and paid off vehicles, who saw an opportunity to upgrade to a new car/truck with a government-funded down payment. Those people have gotten good loans at good rates.

The second wave of people are the ones you describe. Marginal credit that qualify for financing only because of the rebate. I believe many of those buyers will find their cars repossessed before the end of the year.

The second thought revolves around the program itself. I owned a 2001 Dodge Grand Caravan with 123,000 miles. Last year I bought a Kia Spectra sedan. Just for fun, I ran the numbers through the CARS website and only qualified for a $3500 rebate if I traded the Caravan for the Kia (I didn't). Why? Because the Caravan's combined mileage wasn't 10 mpg worse than the Kia's.

Now, I consistently get 33+ mpg on the Kia, compared to 18 with the van, but the rules say what they say.

Points to the mileage dropoff for older vehicles, where the program compares what the mileage was when the clunker was new.

And no one is mentioning how nearly 60% of the new sales are coming from imported vehicles. I don't have a problem with that, but it's interesting that all new vehicles were included, not just domestic brands.

Anyway, when the money runs out, look for car sales to fall below their previous level, as the pull-forward effect takes hold in September.

Then the manufacturers will have to furlough employees in the fall, because they overshot the perceived demand.

Merry Christmas.

Aug 18 01:42 PM