Eight More Days

Congress - in their infinite wisdom - has fast-tracked yet another bill through the House, this one for an additional $2 billion to keep the "Cash for Clunkers" program alive. The money is coming from a renewable energy loan guarantee included in the stimulus bill, which was designed to stimulate the economy and create jobs. It has done neither, and neither will this extra cash, since the cars being scooped up by people seeking the $4,500 are buying existing inventory and not creating demand for manufacturing.

After having woefully calculated the first $1 billion's longevity - it was designed to last until the end of November but was gone after four days - Congress has determined that it would be a good thing to extend the program for another eight days, apparently. And despite the glowing reviews derived from a simple Google search regarding the dealerships' giddiness over the new throngs of buyers, this whole program will, in short time, be revealed as a glimmering rust bucket with a fresh thin coat of shiny spray paint. Here's why.

In order for dealers to receive reimbursement from the government, they must show proof that the clunker has had its engine permanently disabled. This is done by a technician at the dealership donning a protective HAZMAT suit, draining the oil and pouring a sodium silicate solution into the crankcase. The engine is then revved to a high rpm and within seconds, the sodium silicate hardens into a glass-like substance. The engine seizes and the car is worthless.

Now the dealer has to call a salvage yard to remove the vehicle(s) for destruction, but salvage yards do not make money by simply crushing old cars. They make money by selling off the parts - especially the engines, which are the most valuable part - and whatever else they can strip from the car. When it becomes cost prohibitive for salvage yards to accept these clunkers, the dealers are going to have one huge headache.

The other peril of this program is not all that dissimilar from the debacle caused by Fannie and Freddie in the housing market, albeit on a smaller scale. Nonetheless, more people are rushing out to buy new cars when they were driving their old clunkers for a reason; they couldn't afford a new one. The lure of a government subsidy in the amount of $4,500, combined with whatever trade-in value a particular clunker might have, is likely causing people to take on monthly car payments that they may discover they cannot meet a few months from now, especially in this economic climate.

This, of course, leads back to the dealers who will be faced with an increasing "inventory" of worthless cars that salvage yards won't want combined with a fleet of repossessed cars that buyers defaulted on. The current exuberance over the deceiving success of "Cash for Clunkers" will most likely result in an excruciating hangover for the dealers.

And we'll be out an additional $2 billion in about a week.

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