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Inside the "Cash For Clunkers" debacle

In the comments to my previous post on Cash for Clunkers, commenter 'GarandFan' had this to say:

Remember Barney Frank wanting all those new homeowners....the one's who later could not afford the homes they purchased? How many "new" car owners will default several months down the road on that neat $24K new car. Default because they were driving an old clunker because they could not afford a new car to begin with. Even with a $4.5k handout from the government.

What's happening to the clunkers? Dealers are supposed to destroy the engine and crush the cars. Well dealers don't do that. Recyclers do. Are they getting cars for 'free' from the dealers? They have initial costs before they sell the car as scrap metal. They have to pull all the fluids, and all the 'fluff' (upholstery, dashboards, plastic, etc some of which requires special hazmat handling). Any recycle facility will tell you that their main income derives from the selling of usable parts, scrap metal prices (which are currently down) are secondary.

More thoughts on loan defaults in a moment. But first, here is an excerpt from a damning New York Times blog entry, "Dealers Race To Get Their Clunkers Crushed":

The program requires that the clunkers be put out of service for good, so dealers must destroy the engines on cars that are traded in. We watched this process yesterday at the DCH Paramus Honda in Paramus, N.J. It is quite laborious and potentially dangerous. And it certainly is final.

Nick Clites, who is in charge of used cars for the dealership, was prepping a 1988 BMW 535IS, with 214,000 miles on the odometer, for its death. He drained the oil, then donned a silky blue protective suit, goggles and gloves and poured a sodium silicate solution into the engine. He revved the car, and within a few seconds, the solution hardened into a glass-like substance, the engine seized up and the car was dead.

[...]

"Oh my God, what a mess today," Sally Ann Maggio, who co-owns Hackensack Auto Wreckers, also in New Jersey, said on Friday. We visited her car-crushing business on Thursday. She didn't think much of the program to begin with.

Ms. Maggio said she generally makes her profit by reselling the engines, the most valuable parts of the cars she takes, but that's not posible with the cars coming to her because of the cash for clunkers program, because they have been rendered unusable. That cuts down the salvage value of the cars -- and the incentive for salvage yards and wreckers to take them -- to almost nothing, considering the time and energy they must spend in going to the dealer, towing back the dead cars, removing the engines, crushing the bodies and shipping them to a metal scrap shredder and recycler.

And, of course, the process reduces the supply of used engines for people who can't afford to buy a new car and come to the salvage yard looking to fix up old ones.

By all counts, it appears that the Obama Administration's good-hearted attempt to decrease domestic fuel consumption has critically wounded both the used car and auto salvage businesses. The government will not reimburse car dealers for the cash for clunkers bonus unless the dealer can prove that the trade-in car has been destroyed, so dealers must destroy the cars, which leaves the dealers with no other way to recover their clunker rebates if the government reimbursements don't come through (or come through soon enough -- and no, the government has absolutely no concept of "cash flow"). While many of these trade-ins probably are "clunkers," the destruction of these trade-ins means that thousands of potentially good used cars will never be available for resale. And auto salvage operators are left with no choice in the matter; their primary source of income (salvaged engines) has been destroyed by government fiat.

According to the Times blog piece, the government promised a 10-day reimbursement period for clunker rebates. (A short pause for laughter, as I have worked under government contracts and know that government reimbursement takes, on average, three to six months.) But the government's website crashed repeatedly, and dealers have not been able to upload rebate information. When the news broke last night that the program was running out of money and would be terminated, panic among auto dealers ensued. Even with today's $2 billion emergency cash infusion for the clunker program, dealers are still concerned, because they have no idea when they will get their money back.

So what does all of this really mean? Writing at MichelleMalkin.com, Doug Powers notes:

In the private sector -- which the government hopes to compete with using money confiscated from the private sector (some "competition") -- when you create a sale or promotion of some sort, you must make sure you're covered in case it is very successful. Poor planning leads to unhappy customers, which equals going out of business. Fortunately for the government, they have no such consequence as "going out of business." In government, incompetence is rewarded.

In private sector business, there are just as many execs who have been fired because they didn't plan for what to do if a sale went "too well" as there are who created sales programs that didn't work at all.

But people are catching on, and you're seeing that reflected in the poll numbers for government-run health care and even in Obama's plummeting approval ratings.

This sums up the concern of any American with an I.Q. above Tim Geithner's shoe size:

"If they can't administer a program like this, I'd be a little concerned about my health insurance," car salesman Rob Bojaryn said.

One also has to wonder about the wisdom of encouraging Americans to finance new auto loans during the current recession, which is turning out to be deeper than most analysts first predicted. Sure, the government can prod banks (particularly TARP banks) to loosen restrictions on auto loans, but are Americans really in a position to begin spending that kind of money? We're talking, on average, $10,000 to $20,000, not just a $300 or $600 stimulus check. Is it wise to encourage Americans to take on that much debt? And if the economy stagnates (or worse, enters into a "double-dip" recession) how many of these new cars will end up being driven off by the repo man?

It's great to see so many Americans eager to shop for new cars, and the promise of a $3500 - $4500 discount undoubtedly has lured them by the thousands into auto showrooms. But it would be much better to see them shopping because of a true economic upturn, rather than a poorly-designed government handout program.


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Comments (32)

"Cholley" Rangel demands a ... (Below threshold)
Trajan:

"Cholley" Rangel demands a Cadillac each year
for his congressional automobile. It's a
reparations mentality....and don't let Malik
Shabazz tell you otherwise.

MikeGood piece. It... (Below threshold)
HughS:

Mike

Good piece. It's also going to be interesting to see what this program does to the used car parts and repair businesses nationwide.

The government is paying pe... (Below threshold)
Bob:

The government is paying people to trade in their perfectly good, well running cars so they can go into debt to buy new ones from GM (Gov't Motors) or one of its rivals. (The "clunkers" are destroyed, except the engines, which are shipped to China, a country that doesn't give a damn about CO2 emissions or pollution.) The government does everything to vilify and punish those making a profit, while financially propping up those who are losing money - car makers and dealers, in this case, banks, AIG, etc. This is the kind of upside-down thinking that can't help but prolong our economic down turn.

And the law of unintended c... (Below threshold)
JLawson:

And the law of unintended consequences once again bends us over a barrel...

Anytime a government program is proposed, the first question really ought to be "What could possible go wrong?" - and that question not be made in jest, either. Instead, even the most unlikely scenarios ought to be studied and planned against.

Perhaps even better would be if government were to not come up with programs like this in the first place.

Yo, Bob, the article says t... (Below threshold)
Bruce Henry:

Yo, Bob, the article says the engines ARE destroyed, not shipped to China. Which is it?

I hardly think a $1-$3 billion program is going to ruin the salvage industry, or the used car industry either. Is the sky falling, too?

Meanwhile, estimates are that at least 40,000 people bought cars in July who wouldn't have bought them without this program. That's a good thing, right?

Anyone who thinks that private industry can't screw up just like Government need look no further than KFC's recent free grilled chicken promo. KFC has been in business 50 years. Some of the smartest people in the QSR business. What happened?

This artifically induced sh... (Below threshold)
P. Bunyan:

This artifically induced shortage will surely drive up the price of both used cars and used car parts. As usually the Democrats are hurting the poorest in our society.

Since they've come to power they've raised taxes on smoking- which many (most?) low income persons do. They've increased the Marxist employment barriers (a.k.a. the minimum wage). Now this.

Yup, it may be incidental and unintentional (maybe) but the Democrats sure cause a lot of pain and suffering for the poor.

I hardly think ... (Below threshold)
John Irving:

I hardly think

Sums up Democrat supporters quite well, I'd say.

If you got a clunker you co... (Below threshold)
Mac Lorry:

If you got a clunker you could list it as an "official clunker" on some auto trading sites for say $2,500 even though it's actual value may be less than $1,000. Someone looking to buy a new car can buy the clunker and get a $3,500 or even a $4,500 allowance for it while the original owner gets a lot more for their clunker than it's worth. Unless there's some rule that says you have to own your clunker for 90 days or more in order to qualify for the trade-in allowance, then I expect we'll see "clunkers" listed on auto trading sites.

If I was running a junk yard I would see what I had on the lot that could qualify for the trade-in allowance and then advertise for new car customers who need a clunker to trade in. Free enterprise at work.

Hey Bruce, what happens if ... (Below threshold)
GarandFan:

Hey Bruce, what happens if recyclers decide they're losing money and refuse the clunkers?

Before we infuse another 2 billion we don't have, any thought to finding out what kinds of cars are being traded in? We've all seen the MSM pictures of clunkers. Yeah, those look like what most of us can agree 'are clunkers'. Here is Tucson this morning, the paper has a pic of a car being traded in. 1995 Suburban. Looks to be in immaculate condition. Yeah, a 'gas guzzler', but it's not a worn out clunker. JUST HOW MANY 2-3 YEAR OLD CARS HAVE BEEN TURNED IN?

I don't know about you, but most people I know who drive 'clunkers' do it for the simple reason that it's all they can afford. Should the party "that care's about people" be encouraging them to go into debt for a new car right now? To be consistent, Obama should have Barney Frank running this program. Or maybe, given the current results, he already is.

How long will this program run? GIVING money to people to buy cars. Money we don't really have. This is beginning to sound like a Ponzi scheme. Last time I checked, that was against the law. But that was before the Chicago Mafia moved into the White House.

Mac, the CARS program stipu... (Below threshold)
Tim:

Mac, the CARS program stipulates that your clunker must have been registered and insured in you name for a full year. So that takes that option away.

My 2002 Nissan SUV qualifie... (Below threshold)
jvc:

My 2002 Nissan SUV qualifies as a clunker, and would get me $4500 at trade-in (if I bought another SUV which has at least 2 mpg better fuel economy), where it would be promptly destroyed. Why would I do this, when I could sell it outright for nearly twice that? Even so, this vehicle is in perfect condition, and it's just flat-out wasteful and stupid to destroy a perfectly good car just to appease envirojerks like pelosi and waxman. Can we trade in these clunkers?

Wait an minute! <br ... (Below threshold)
jim:

Wait an minute!

If everyone received the maximum amount of $4500 for each car the $1B should have provided for over 222,222 people to turn in their cars.

This program got 40,000 people to buy cars that wouldn't have? That's $25,000 per extra car purchased. Why are we not just giving away cars? How many pols lined their pockets with this one?

This reminds me of a conversation I had with Oncologists from Canada years ago. Their pediatric bone marrow transplant program shut down every year by June because their government controlled funds ran out that quick. After that anyone who had a child with leukemia had to wait and hope that in 6 months their child would still be alive to receive treatment the next year.

I can't wait for government controlled health care. These imbeciles can't run auto dealers for half a week and they think they can run 17% of the economy for the rest of eternity?

Why the hell is the Gov't e... (Below threshold)
Les Nessman:

Why the hell is the Gov't encouraging poor people, who can only afford clunkers, to go into debt for a brand new car?

How many of these new cars are going to be repo'd in a couple years?

Good point Jim. I'd ... (Below threshold)
Les Nessman:

Good point Jim.
I'd like to know how many cars in total this billion dollars covered. I don't think 40,000 is the total number.
After the first billion was all spent, how much per car did this program spend?
I think we have a right to know just how efficient this program is.

Robert A. Heinlein"N... (Below threshold)
Meiji_man:

Robert A. Heinlein
"Never attribute to malice that which can be adequately explained by stupidity."
-- Robert A. Heinlein

AS much as I hold this quote to be true. AFter a while I have to start worrying. Either Obama is the Smartest President Evah! And he has foreseen all this before and this is happening according to his plans. OR.
He's a moron with no understanding of how the world works outside of government and academia and so are all of his supporters.

One means he is attempting to raise the cost of car ownership to the point where the poor will not be able to provide their own transportation and will be dependent on the government to provide public buses. With an resulting negative impact to out economy.

The other means he was just trying to by votes with the first stuping idea that came along.

So which is it? Man trying to destroy America or Moron?

Obama can credit all his ec... (Below threshold)
GarandFan:

Obama can credit all his economic knowledge to his socialist mama, grandma and grandpa. I'd also credit his daddy, but the man had already moved on to wife #2 of 4. Obama is of a mind that socialism 'never failed', it was the people who 'failed'. But HE thinks HE can correct that. Don't call him "the Obamassiah" for nothing. No one has a higher opinion of Barry Obama than Barry Obama.

So which is it? Ma... (Below threshold)
Mac Lorry:
So which is it? Man trying to destroy America or Moron?

It's Moron trying to destroy America.

Since this program has alre... (Below threshold)
Les Nessman:

Since this program has already blown through all the money, why not pause it for a while?

Take a few months to reflect and study how well/not well this worked so you can improve it.
Plus, instead of the entire flood of new car buying happening all at once, you can spread it out. It doesn't help the car companies as much if all the cars are sold all at once. If the boom is over, now what does GM do?

But no, I don't suppose they will pause to look at the program because they know that the real cost per 'clunker' is going to be way more than $4500, and many people will be pissed when they find out.

Tim,The bulleted i... (Below threshold)
Mac Lorry:

Tim,

The bulleted items on the home page of the CARS.gov says that the "Trade-in vehicles must be registered and insured continuously for the full year preceding the trade-in" It doesn't say that it has to be in your name. Only when you get into the fine print do you find out that it has to be "registered to the same owner for a period of not less than 1 year immediately prior to the trade-in." Typical govenment nonsense.

From an environmental standpoint it really doesn't matter if you owned the clunker or someone else did as long as it was registered and insured (being driven) it has the environmental impact the program is designed to curb. Leave it up to government to write self-defeating rules. Just imagine what crap is in HR3200 the 1,000 page healthcare bill!

He drained the oil... (Below threshold)
jvc:
He drained the oil, then donned a silky blue protective suit, goggles and gloves and poured a sodium silicate solution into the engine. He revved the car, and within a few seconds, the solution hardened into a glass-like substance, the engine seized up and the car was dead.

Why all the drama? Why not just put a .50 cal bullet through the block? Oh yeah, these same eco-zealots are often anti-gun. So this must be their way of euthanizing the evil internal combustion engine by lethal injection. But ... doesn't the engine have a right to standing (and an attorney), as science czar John Holdren has professed for trees? Just askin'.

Re comment # 13: I... (Below threshold)
Bruce Henry:

Re comment # 13:

I was mistaken about the 40,000 car estimate. Turns out it's closer to 250,000.

I've never been a car salesman, so I don't know what the commission would be on, say, a $17K car sale, but I'll bet those salesmen are glad to get it! And I bet they go right out and spend it on stuff they've wanted to buy for some time, but couldn't afford because they weren't making any sales. Not to mention the benefit to auto companies and their workers. Pretty much the definition of "stimulus".

One other thought. This is... (Below threshold)
GarandFan:

One other thought. This is driving demand for cars up right now. So what happens in the next 6 months. Seeing as 250,000 people brought cars now. How many normally buy cars during a 'normal' period? Does this presage a 'dry period' when no one shows up in the dealerships? How many will be 'UNEMPLOYED' then?

Sorry libs, but Barry's grasp of economics and market forces leaves much to be desired. But then, Barry isn't about keeping the market functioning, is he.

"By all counts, it appears ... (Below threshold)
Tim:

"By all counts, it appears that the Obama Administration's good-hearted attempt to decrease domestic fuel consumption has critically wounded both the used car and auto salvage businesses"

I have a bridge to sell you.

The creators of this program knew exactly what they were doing, as did a number of people who raised objections well before it was launched. This was not an accident.

Someone has to pay for the ... (Below threshold)
Kathy:

Someone has to pay for the billions being sunk into this program. And I am guessing that it will be the taxpayers!!! So I am going to have to pay for someone else to buy a new car when I myself can't afford to buy a new car??? Makes no sense to me.

"Someone has to pay for ... (Below threshold)
JLawson:

"Someone has to pay for the billions being sunk into this program. And I am guessing that it will be the taxpayers!!!"

You're smarter than most of the ever-so-intelligent libs on this board, KAthy - who seem to believe that the money comes from a tree in the backyard of the White House.

Government gets its money from US. Those $4500 'rebates'? They're from the taxes you and I pay.

Take a look at how much income tax you PAID on your 1040 form last year. How many cars did you provide?

This whole absurd program (... (Below threshold)
Randy W:

This whole absurd program (like so many we've seen from this administration),reminds me of Winston Churchill's quote. 'The government trying to create prosperity is like a man standing in a bucket and trying to lift himself up by the handle". If government would just get the bleep out of the way,things will turn around.

Typical government program.... (Below threshold)
RM:

Typical government program... cash-for-clunkers is already costing THREE TIMES it's original estimate. Imagine the DISASTER if these politicians attempt healthcare reform.

Y2K created a high tech bub... (Below threshold)
silvermine:

Y2K created a high tech bubble (once everyone upgraded for Y2K, no one needed to upgrade equipment for a few years -- sales plummeted, high tech shops went bankrupt and sold all their equipment on eBay, which meant even less market for new equipment...).

Fannie and freddie created a house bubble.

Now meet the car bubble!

Our goverment wants people ... (Below threshold)
Flu-Bird:

Our goverment wants people to turn in their old cars for cash its just as rediculous as exchanging your gun for a pualtry $100 or for dumb giftcards or stupid musical insterments CASH FOR VOTING THESE OLD BUZZARDS OUT OF OFFICE

Democratic Definition of "S... (Below threshold)
Dave Stabnow:

Democratic Definition of "Success"

The democratic administration considers the Cash for Clunkers program a huge success, and they want to increase its funding. Let's examine what they consider a success.

1. It blew through a lot of money fast. The first billion lasted about a month, so they want to add two billion more. A billion here, a billion there, pretty soon you're talking real money.
2. It rewarded previous irresponsible behavior. My wife and I pay cash for used cars. Many years ago we bought a small, reliable car with manual transmission, and we average about 33 miles per gallon. When we wanted a larger car, we bought a small minivan, and it gets about 24 mpg all the time, up to 30 on the highway. Because we are frugal and relatively nice to the planet, we do not qualify for this reward. No, this windfall is for people who have been driving SUVs and pickup trucks, burning through the world's energy supply like there's no tomorrow--and there might not be.
3. It punished the majority for the sake of the minority. This program is about to jump to 3 billion dollars. There are roughly three hundred million people in the United States. Therefore, every man, woman, and child in the USA must chip in $10 so that fewer than a million people can buy a new car. (Of course, the poor pay less, so the men, women, and children of the middle class and upper-middle class will have to pay more.) In this sense, it's like a lottery: a lot of people lose money; a few win--in this case, about 0.03% win. Any responsible financial advisor will tell you that a lottery is a bad idea for the majority. Any psychologist will tell you a lottery is a good way to take advantage of the oppressed and distressed.
4. It did not benefit the ones originally targeted. The democrats want to help the oppressed poor and distressed corporations, and save the planet while they're at it. But poor people can't afford to buy a new car, even if you give them a $4,500 head start. So who's taking advantage of this program? Middle-class workers who have a steady job and some cash reserves, and who have an old SUV that's worth less than $4,500 as a trade-in. These people don't really need government help. And which corporations are benefitting? GM and Chrysler? No, despite the incentives, people are still not willing to buy a mediocre car from a poorly managed company. The top five vehicles include two Toyotas, two Fords, and a Honda.
5. It only accomplished moving from deplorable to sub-standard. So, at least we're saving the planet by taking those gas-guzzling SUVs off the road in favor of efficient vehicles, right? Not necessarily. If I had a pickup that gets 12 mpg, I could get $4,500 toward a truck that gets 18 mpg. Or I could trade that same pickup for a car that gets 22 mpg and pocket the $4,500. That sounds pretty good. But the current average for all vehicles is 25 mpg--they're not even requiring that this program meet upcoming government CAFE standards. So the democrats are celebrating a below-average outcome.
6. It was wasteful. One of the requirements is that the car you trade in be drivable. What happens to that serviceable vehicle? Do we give it to the poor, who need basic transportation so they can get a job? No, we pour vitreous liquid into the engine to permanently disable it, then crush the car.
7. It was legislated largesse. "A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years." (Attributed to Tytler, 1770.)

I don't know how many of these democratic successes we can handle. We should try for some failures just to keep the nation afloat until the next election.

Why must they have been ins... (Below threshold)
John:

Why must they have been insured for the last year? What kind of total nonsense is this? They are going to be scraped! More total insanity from Washington as usual!

I believe I read a few mont... (Below threshold)
Charlotte:

I believe I read a few months ago (before it actually came about) that all this clunker catastrophe was imbedded in a Military Spending Bill. So, does that mean the 3 billion+ will be funds taken away from our soldiers? Hmmm.




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