Friday, August 07, 2009

Why I didn't take, and won't take part in, the Cash For Clunkers plan

After the previous post, I was contacted by somebody who asked why I just didn't go to a car dealership and take part in the Government sponsored Cash For Clunkers program. Now, rather than respond directly to this person, I've decide to just do a generic blog post explaining my reasons why I didn't take advantage of the Cash for Clunkers program, and why I'm not going to take part in the Cash for Clunkers program.

Now, can anybody tell me how the current financial crisis was initiated? If you answered something to the effect of, banks lent money to people that couldn't pay it back, you'd be right. So does anybody know why banks lent money to people who couldn't make the payments? If you answered affirmative action, lawsuits from liberal democrats, and courts making law instead of interpreting law, you'd be right. Many banks and lending agencies were forced to lend money to minorities and certain racial groups on the grounds of having to be fair. Banks and lending agencies couldn't just tell a minority or certain racial group that they just didn't have the credit rating or security to justify the loan. In some cases, people who were declined loans because of failure to pay past loans on time, or failure to maintain a steady job, or were unable to present any proof of being able to actually pay the loan back on their current job, took the decline of their loan to court and won the loan amount on the basis that they were being discriminated against for their color, genetic background, or any other excuse.

The obvious solution to this sort of lending problem is to simply reject loan applications based on facts. Have you held a steady job? How much does your job pay you? Have you paid your bills in the past on time?

However, Democrats don't deal in facts. They really don't. The cash for clunkers program is proof, and here's why.

Can anybody tell me the demographic of somebody who is likely to drive a clunker car? If you said something to the affect of a low-income to middle-income family, you'd probably be right. People who drive clunkers... generally couldn't afford a new car to begin with. While their are exceptions, such as people who buy clunkers to rebuild them or refurbish them, or those that just like collecting cars, you wouldn't be wanting to take part in the Cash For Clunkers program. Upper middle class and rich families that were already buying from Porsche, BMW, and Audi, probably didn't have clunkers they wanted to trade in anyways.

Okay. So our demographic of low-income to middle-income is set. Can anybody tell me what the average cost of a decent car? Well, a VW 2009 Rabbit starts around $21,000. A Golf GTI is $24,000. A Honda Fit Sport starts at around $18,000. In fact, if you want something that's under $15,000 in the US? You'd better start at Kia. It's such a noticeable split in costs, a local Ford Dealership near where I live makes special mention of it's inventory under the $15,000 mark.

Okay. So for a decent new car from pretty much any car dealership in the US... is going to start around $15,000 if you cut everything out... and you'll be pressing $20,000 for a decent car with all the trim.

How much can you get for the best condition clunker on the Cash For Clunkers program?

I see the light clicking on in some eyes out there. You probably thought $4500. Which is just about right if everything goes your way. Realistically, the Cash for Clunkers is only gonna net $2000 to $3000 back. I'm not saying that isn't a lot of money...

I am saying that $15,000 - $3000 is still $12,000.

The really huge problem with the Cash for Clunkers program is that even in the best case scenario, you probably won't even get a third of the cost for a brand new car, with a factory warranty, and all the trim that makes it worth living in. In order to come out even slightly behind, you'd have to go buy a car from a Korean or Malaysian dealer... and no, that's not a good thing.

If you went and bought a Toyota, a good Ford, a Honda, VW, or anything else remotely decent, even with the Cash for Clunkers program you'd still be roughly $10,000+ in debt. You'd also be locked into a multi-year payment contract.

And what happens... if you can't make those payments?

Have I made the picture clear enough? All the Liberal Democrats have done with Cash For Clunkers is merely set the foundation... FOR ANOTHER FINANCIAL CRASH.

The demographic mostly likely to have clunkers, and the demographic most likely to use the cash for clunkers program in order to get a new car, is the exact same demographic that couldn't afford new cars to begin with. Even with a $2000 to $4000 discount, there's a real big question of how many of those purchases will default. How many car dealers have lent money, in the form of cars, to people that simply can't pay that money?

For me then, since I'm obviously capable of seeing the inherent financial trap in the Cash for Clunkers program, I'm not remotely interested in trying to take part in it. Yes. I think I have a steady job. Am I confident enough in that job to risk a $10,000+ loan from a car dealer?


My observation does raise a crucial question. If the trap of car dealers selling cars to people who can't afford cars is so obvious... why would car dealers knowingly take part in such a bad business practice? My gut reaction is that the majority of car dealers look at what happened with GMC and Chrysler. Rather than simply standing aside and letting them die, like British Leyland, GMC and Chrysler have been bailed out. Many car dealers today might be betting their futures on getting bailed out again.

Question: what happens when Obama and crew is kicked to the curb and their legislation is repealed? What happens when GMC and Chrysler are told to make like BL and just DIE?

You don't think that's going to happen? Are you really confident enough to bet your money on it?

1 comment:

B said...

I was reading through your builds -- interesting stuff; I like how you're focusing on lower-level stuff, not the usual super-purpled one on the forums -- but this entry has some issues.

Quoting from :
"The campaign to racialize a global financial meltdown operates in a fact-free zone. A national study of the performance of banks covered by the Community Reinvestment Act (CRA), enacted by Congress in 1977, shows that these government-backed banks were much less likely than other lenders to make the kinds of risky, high-cost home purchase loans that helped fuel the foreclosure crisis. The average interest rate for CRA loans was much lower than other lenders. CRA banks were more than twice as likely as other lenders to keep the loans they write instead of selling them off to the highest bidder." (Not every bank operated under the CRA, so you've got a straightforward comparison).

The meltdown happened because banks could offer mortgages and within a few months sell them off to large firms who, rather than assessing individual mortgages, relied exclusively on simplified mathematical models to estimate risk; then Wall Street figured out a clever way to take even more risk while pretending it was just as safe.