‘Cash for Clunkers’ Program will Exhaust Itself

Published by clickbroker.blogspot.com.

The Wall Street Journal’s “Dealers Scramble to Find Fuel-Efficient Cars” reports potential shortages in the more popular higher mileage vehicles sought by the consumer stampede into the CARS (Car Allowance Rebate System) program. This super-hyped government program is the subject of endless advertisements by all of the domestic manufacturers. It is so hot that even the most demagogue conservative Republicans have had to put their ideology to rest.

The program’s popularity in the industry is rooted in its showroom traffic generation. Dealers can’t sell anything without customers, so any sense of excitement is welcome. And those that don’t qualify can be “bait and switched” with an alternate deal. All the news reels of clunkers being destroyed at the dealerships and contrived “worry” that program will run out of cash increases consumer anxiety to act now.

The news media continues to dispel the rumor that even the extra $2B just approved for the program won’t last through September. But I say calm down. Just like the tape recorder in the old “Mission Impossible” TV program, the CARS program will also self-destruct. That could be why its ideological opponents only pretended to put up a fight.

The first batch of clunkers came from a prudent set of consumers with high FICO scores. They most likely kept their clunkers because it was more economical to maintain rather than replace their vehicles. Sooner or later we will reach stage two when the remaining clunkers are no longer in strong hands. The clunkers left will be owned by consumers that have to drive a junker; not those playing the game of how long can I make this last for fun.

Even Warren Buffett traded his storied Oldsmobile for a new Cadillac a few years back. With fewer frugal Buffett protégés holding qualifying classics, the CARS program will either die of exhaustion or be modified. Either way, it won’t require new funding. Most likely money would be transferred from other parts of President Obama’s stimulus. This appears to be the only real economic action I’ve seen in any of the stimulus programs.

The real question is does the CARS program actually benefit consumers? The Wall Street Journal’s “Lawmakers Seek 'Clunker' Vouchers for Out-of-Stock Cars” and “Clunkers Prove Common, But Dream Cars Are Scarce” report that consumers are unlikely to have much bargaining power when they seek the maximum $4500 CARS voucher. They are likely to have to pay full sticker from the dealers or settle for their second choices.

Whether we are experiencing a mini automobile bubble or the effects of an airline style capacity reduction is unknown. But hysteria is never the right time for a consumer purchase. Clunker or not, it is highly likely that on a total deal basis consumers will fare better in the fall. Remember every car has some value to the junk yard, as long as the engine is not destroyed. (The CARS program required that dealers destroy the clunker’s engine.)

Previously I wrote "Fed Running Out of Credit Worthy Consumers". The government’s programs to add liquidity to the economy are useless unless the liquidity gets to the hands of consumers financially able to spend it. I draw the same conclusion with the CARS program.

While I’m honestly surprised that so many clunkers were held by credit worthy customers, I am again stunned that customers are fighting to get an end of model year car at virtually full price. But if you must, get that Pontiac before it’s too late.

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