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, 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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