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"Cash For Clunkers" Will Cause Another Bubble

August 13, 2009 - 8:32am
Nick Coons by Nick Coons

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When the Federal Reserve flooded the market with credit almost 10 years ago, in order to help fund the demand on banks made by the federal government to lend money to questionable borrowers, it created a boom in the economy. But because it was a manufactured boom and not a real one, it was destined to bust.



Businesses saw the increase in demand and began ramping up capacity to meet it.  When the artificial demand ran dry, the increased capacity was left unused as unemployment began to rise.  Today, we see the same thing in the works with "cash for clunkers", a federal government program to encourage people to get rid of their old cars and purchase new ones by providing them with up to $4,500 in trade-in credit.

Ford and other automotive manufacturers are ramping up production in order to meet the demand for vehicles sales generated by this program.  Eventually, this program will come to an end, and no one can predict exactly when that will be, and automotive manufacturers will be left with vehicles they built to meet a demand that suddenly vanished.

Originally, it began with $1 billion that was supposed to start in July and end in November, or whenever the funds were depleted, whichever came first.  The funds were consumed within a week, and Congress added $2 billion more to the program.  What will happen when this $2 billion is used up?  Will that be the end, or will Congress throw more taxpayer money into it?  No business can expect to make long-term plans when the chess-master is arbitrarily moving the pieces and changing the rules.

But this program has caused additional "right now" side effects.  Car dealers take in cars on faith that the government program still has funds available to provide the credit, as this information is not available real time.  How is a dealership to know when they need to stop?  What if they're left holding the bag when Congress says "no more money for the program"?

Additionally, used vehicles in the $3,000-$5,000 range are the lifeblood of lower income Americans.  Who would want to sell their $3,000 car for $3,000 when the government will give them $4,500?  Hence, the availability of low cost used cars (which, when turned in, must be destroyed, not resold), on which lower income families depend, are becoming more and more difficult to locate and purchase.

Ultimately, this program is an example of a relatively few trying to shape the economy to match their own view, but they're doing it with our money.  Those of us who, for whatever reason, don't qualify to take advantage of this program, are now buying new cars for our neighbors.



Related Content:

Financial Bailout - Nick Coons
Disgracing Support for Bailout - Nick Coons
Monetize the Debt? - Jim Iannuzo


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