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Friday, July 31, 2009

The Cash For Clunker Debacle

With the loan modification program the problem so far is that the program is so complicated, confusing and convoluted that it's hard to get any loans approved under the program. As such, a program that was supposed to save millions of homeowners from has saved a fraction of that. The cash for clunkers program has a totally different problem. It's so lucrative and straight forward that it's exceeded demand and is now out of money. This was supposed to be a $1 billion program in which car buyers traded in their older cars for new fuel efficient vehicles and received a $4500 credit from the dealership that would be applied to the new purchase. The program was supposed to last until the fall. It appears to have run out of money in four days.

Now, dealers are scrambling to get their money. Dealers would give a credit to the buyer and then go to the government to get that same $4500 back. If the $1 billion has run out and a dealer still hasn't received their money from the government, they're stuck. Furthermore, all the major car companies have taken out significant ad time for this program. Now, all of that is on hold.

Meanwhile, dealers are scrambling to make sure that they receive their money from the government. After all, the so called "clunkers" aren't worth anywhere near $4500 and if they don't get their money from the government, most of the cars they sold under the program would have been sold at a loss. Now, the program has been official suspended, indefinitely, as of midnight.

So, now a program that dealers and car makers thought they would be using for months is cut off in a matter of days. There are already law makers that are calling this a shining success. If you give anyone a good enough deal, they will take it. In this case, the government was literally giving a billion dollars to anyone who wanted to buy a car.

Of course, this was a success. People were getting a $4500 subsidy from the government to buy a car. That doesn't mean it will stimulate the economy. If you want to put money into people's pockets, just cut their taxes. Instead, the government came up with a scheme that would do something similar only in a much more confused way. Now, after overwhelming sales for five days, the whole program is confused and in chaos. A lot of car dealers will be left holding the bag on worthless cars they gave a $4500 credit for. That's not necessarily stimulative. A lot of car makers will have spent money on ad buys that are no longer valid. That's not necessarily stimulative.

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