Crystal ball about Cash for Clunkers

Ok folks. Soooooo... what's going on here? Do you think that whole 'Cash for Clunkers' ($4C) program has a predecessor? Any similarities with things in the past we've recently experienced? I think so. Let's see if you see so too.

$4C was a program that was created with the ultimate goal of getting old cars (beaters with heaters) off the roads (that normally get lousy gas economy) and replace them with cars of a more efficient nature. Sounds reasonable on the surface. I mean, when we have gasoline that see-saws back and forth between $2.25 - $3.00 and sometimes jumps above to tango with $4.00 for a while, who wouldn't want a car that will help save money when going to the pump. So, the focus is ... 'use less gasoline' .. 'lower our dependence on foreign oil supplies' ...'save money at the pump' ... that's the goal.

When $4C was developed, the US government wasn't *officially* the owner of a couple of major car companies. Now it is. So, you'd think that this would help US / domestic car sales, which I'm sure over the last week or so, it's been brisker than normal and for quite some time. Which, is something I can't complain about.

I'm not happy about cars getting crushed or otherwise rendered un-operable when they could still be used for something good. Here's a youtube video showing a 4-minute death to what looks like a perfectly good Volvo. They certainly didn't put this Volvo out of it's gas-guzzling misery in a quick fashion. It looked like torture to me.



For families than can't afford a good used beater with a heater that is good transportation that'll take them to the grocery store, school, or work. Usually the beaters with heaters that I've owned, have had inexpensive liability insurance, wasn't a complete gas hog, and typically were fairly easy to repair. When a battery, water pump, belt, starter, alternator, tune-up, spark plug wires, distributor cap, disk brake pads, etc, etc, etc.. were needed.. the few dollars needed was easily acquired and used to get the parts to bring the car back to working order. One thing is for sure, all the beaters with heaters I've ever had never had a monthly car payment. Just gasoline, oil, insurance, and maintenance costs... period.

Fast forward to a time when the economy is suffering under a Bear Market Cycle (previous blog entry about Market History Cycles) when money is tight, people are losing jobs, and people are struggling for each and every dime they have because it just might have to go to essentials like groceries, gasoline, medicine, etc. Things are not rosy what so ever. Along comes a program that essentially gives people money and entices them to trade in their beaters with heaters to obtain something that's definitely not a beater .. and likely has a good heater .. and is improved in the miles per gallon department (which the minimum requirement is a savings of 4 miles per gallon improvement from the clunker to the new car [used cars are inelligible]) as well.

During this struggling economic time, people have been avoiding acquiring more debt and have been generally saving more for the rainy day. Yet, this is a program that is too tempting for many to pass up. When deal is done, and they qualify for the $3500-$4500 rebate, they shake the sales managers hand, and they likely walk away with a shiny new car.... and a monthly payment that they didn't have before. Who knew that was going to happen?

Now, when they were previously getting by on gasoline, insurance, and maintenance costs .. though they'll pay less in gasoline (assuming they drive the same amount or less), their insurance will no longer be inexpensive liability insurance.. they'll have to have full coverage with comprehensive... which is significantly more expensive. They'll have to pay a monthly car payment instead of monthly maintenance costs. Some months, there might not have been any maintenance costs. And some months there might have been quite a few. Just depends. With a new car, though maintenance is probably covered in the warranty, they'll now have a monthly payment whether they like it or not. If the car is running fine (or not).. for the next 48-72 months there will be a payment that they are likely not used to be paying. Generally, though people were able to get their new cars, could the cars really be afforded when income is dragging down more and more.

Sound familiar anyone? How about the whole sub-prime mortgage fiasco that started this whole economic mess. People couldn't afford houses though it was thought that everybody had a right to have a house whether they could afford it or not. These loans, for those that had a pulse, were given the mortgage in order to *get them in the house* .. not because they earned it. What happened to make them miss their payments? Ohhh.. yeah... they became unemployed because the economic market has been going sideways for a few years now. Their life somehow had a life change... and they weren't able to obtain a replacement j-o-b to make up the difference between the old well paying job.. and new job that pays significantly less. People generally won't go on a strict rice-n-beans diet and riding bicycles to save money, because they think they are too good to sacrifice and save money in order to get by. So.. they continue to spend, spend, spend and their house payments fall behind. After all, it's only the guy next door that has his house taken away.. "not me". What happened after they *proved* they couldn't keep up payments on the house on these sub-prime loans? Eventually, they lose their house in foreclosure.

So, is the $4C program that big of a help? I really doubt it. It is serving to be a temporary stimulus to the car dealers as they are reaping in the benefits of sales that haven't been there for a couple years. This is kinda like a modern-day version of the Prodigal Son that took half of rich-dad's money and whooped up his lifestyle with many a friend as long as his stash of cash was abundant to fund frequent parties. Once the prodigals' money ran out, all of his party friends abandoned him and he went back to dad ... broke. I think, once this program runs out, the sales will fall off a cliff (as before) and the lack of stimulus to the car dealerships will have run it's course of prosperity. Once the dealerships are back to bare-bones cash-flow, they'll start reducing their staff to contribute further to the slower economic time with less people employed.

If cars could be given away without cost to anyone, that'd be one thing. With the debt that the nation takes on for everyone that gets a $4C car, this is a tab that the American people will have to pay (when it comes to the rebate received). Not to mention, since the economy is still going sideways (or down.. it's truly not turned UP yet as signs of recovery show a slowing of the recession.. but not a ceasing of it) .. there will be more companies that will be laying off more employees. And there won't be a list of those that bought in the $4C program in order for their jobs to be preserved because it's important that they always are able to pay their payments. No, the employment axe will fall many many more times, cutting those out that have $4C cars and some that don't. Those families that are adddled with a $4C car and no job .. will probably help to contribute to a new loan crisis of bad paper much like the sub-prime mortgage crisis was.

Plus the advent that the next $2 billion is about to be dumped into a $4C to make it possible that people can continue this streak of stimulus spending.. will bring more people into this program that will potentially be bitten by the economic bug putting themselves into an economic bind .. contributing to the $4C bad-paper loan crisis.

I suppose there are some car companies (at least I think I recall a commercial) that will pick up the payments for your car if you find yourself unemployed and can't make the payments -or- maybe they'll take the car back if it's purchased within a year and unemployment occurs. In neither case, people still don't get to keep their cars if unemployment is still their status and they aren't able to make payments for the duration of the loan. Either the car company will make the payment or the car is given up in collateral. I can't imagine someone putting their house up for collateral when they buy a car. I suppose some have done that in order to get the $4C car. I hope, for their sakes, that their jobs remain preserved because not only could they possibly lose a car, but a home as well when things go bad when they weren't looking forward to think of the possibility.

Do I want these loans to fail... eventually? No. I want prosperity for all. I want an abundance of money for everyone. However, in this current market time, money isn't flowing freely around to everyone. There will be those that go without money. If they bought a $4C car, I hope that their money supply isn't squelched. This could really cause another cascading failure upon the different financial institutions puttng people in very difficult situations.