Cash for Clunkers – One More Look

Posted by Larry Miller on August 20, 2009 under How | Be the First to Comment

After drawing hoards of buyers into dealer showrooms and helping these dealers pry open customers wallets, the Cash for Clunkers program shows the danger of businesses depending on a government that has little understanding of economics and none of business operations. Because of this, many of the 450 member of the Greater New York Automobile Dealers Association (GNYADA) which covers metro New York City, have decided to suspend their participation in the Cash for Clunkers program.

They cite the lengthy application process, up to several hours per vehicle aggravated by frequent computer glitches in the Department of Transportation system, combined with an astronomical rejection rate for minor errors and the lack of guidance to a workable correction process that would facilitate their payment. The dealers say they are not able to get timely acceptability answers about vehicle qualification. After all this, they can’t even speak to a live person for support without a several hour wait on the telephone.

As if this were not enough, the dealers have no way of knowing when the allotment of three billion dollars is gone. Anecdotal evidence tell us that in Maryland only two percent of the claims have been paid to participating dealers. It seems bureaucracies have no comprehension of cash flow needs or concern for the businessmen who have to make payrolls and keep the economy running.

Why is this a problem? Why is this possibly worse than the delays health care providers face from Medicare? Automobile dealer operations use a great deal of credit. They don’t own the cars on their lots. Financing for the dealer’s stock comes through what they call a floor plan. The deal is that as long as the car is in the dealer’s possession, they can pay interest only. However, once the car is sold, it must be paid for in a very few days and the lenders audit this frequently. You may remember the scene in the film Fargo where the auditor came around to William H. Macy’s dealership and could not locate the car he had given in payment to his inept hit men. Lenders take this control of inventory very seriously and prompt payment is required.

What this means is that when a dealer takes in a clunker in trade, he gives the $4500 credit for the auto traded in and the happy owner drives off in his new car. The dealer must then pay for the car he just sold… plus commissions and overhead, which is a reasonable thing under normal circumstances. But, he is short the $3500 or $4500 he knocked off the price to participate in the program. This is where the rub comes and why this is putting many dealers in a financial bind. They are paying off cars without sufficient cash flow from the transaction to make the payment. If they had a timely reimbursement from the clunker program they could deal with their obligations under the floor plan. As it is they are digging into ever shrinking cash reserves… or they have to borrow more money which carries its’ own expenses. Neither of these methods can go on forever… sooner or later the money runs out and the employees are out of a job.

Having gotten in bed with the federal government, they can’t even use the trade in to get a little cash as they are required to destroy or render the vehicle inoperative long before the fate of their refund application is known. If someone were looking for a way to destroy auto agencies, this would be a grand way to do it… flood the system with so much business that they can’t turn down, while not allowing them enough cash flow from these deals to pay the bills. In some ways, this is the Alinsky / ACORN approach of overwhelming the system until it collapses so it can be rebuilt in the socialist model.

Was this really what the DC brain trust had in mind when they dreamed up this scheme? I can’t say. It is, however, the effect. I’m not sure which is more frightening: a government that purposely destroys an industry or one so incompetent that, in trying to help, delivers a fatal blow to many they say the are trying to save.

And then, they want to control health care!