Cash for Clunkers Part II: Dealers Have Clunkers, No Cash

            In last week’s first Cash for Clunkers installment, Cash for Clunkers Part I: Good for Businesses?, I discussed the potential threat the program poses for small businesses. This week I am presenting Part II.

            Auto dealers across the country have been accepting qualified jalopies from consumers in exchange for up to $4,500 off of a new ride. Under the guidelines of the program, the federal government promised to repay auto dealers if they submitted the appropriate rebate forms. This week, the Department of Transportation (DOT) reported that 411,624 rebates have been submitted, totaling over $1.7 billion—more than half of the $3 billion that the government dedicated to the program.[1] Then yesterday U.S. Transportation Secretary Ray LaHood announced the program would be shut down Monday August 24^th because the $3 billion had dried up.

            The concern underlying the delayed payments is two-fold. For one, this is another commitment the government volunteered American tax dollars to without being adequately prepared to efficiently follow through. With every new government-sponsored program, we are losing loads of money to inefficiency. The second concern is that dealers typically purchase new cars from the manufacturers through finance programs. Often times, such financed deals cannot be paid off if the dealers are waiting on money from the government. Therefore, the dealers continue to pay substantial interest charges, which cut their profits on the vehicle sales. Interest fees could be difficult for many dealerships to swallow during what has so far been a dismal year for the auto industry.

            According to the National Highway Traffic Safety Administration (NHTSA), the federal agency in charge of overseeing Cash for Clunkers, it is racing to dedicate more staff to deal with the current massive backlog of rebate applications. The DOT reported that the NHTSA Cash for Clunkers staff “will hit 1,100 by the end of this week.”[2] In order to reach this high number of staff members, Citigroup and federal employees are being taken away from their current duties to help clean up the program.

            The ideas behind recent government-sponsored programs are rushed through Washington only to reach the general public with great inefficiencies. It is true, as Warren Buffet recently wrote in a New York Times opinion article, that “Our immediate problem is to get our country back on its feet and flourishing – ‘whatever it takes’ still makes sense.”[3] However, “whatever it takes” does not always need to translate into sacrificing preparation for the sake of immediate action. The amount of money the government wastes trying to clean up these programs after they are implemented could be dramatically slashed if officials took more time to think them through.

Short-Term Investments Clash with Long-Term Goals

            While investors who armed their portfolios for the long-term still experienced massive losses, they are better suited to ride out the turbulence than those who speculated for the short term. Stocks prices have jumped 40 percent higher than recession lows back in March, but investors should still be prepared for market pullback, which appears to be inevitable. With many experts predicting a bumpy recovery, long-term investments are getting more and more attention.

            Hoards of investors panicked and pulled their long-term capital from equities as the stock market deteriorated. Now, many of them are attempting to patch up their battered portfolios with stable, productive long-term investments. As investors’ emotions are calming and they are again taking action with their life goals in mind, the hunt for smart investments with long-term perspective is becoming more appealing. The media reports daily that we are amidst a buyers’ market, but the majority of the opportunities are suited for short-term investors looking to reclaim their loses overnight. After experiencing record losses, individuals are less cautious of risk. They are more willing to take on greater risk if it comes with the slight chance that they can quickly heal their deep financial wounds. However, wise investors are curbing the need to speculate in the short term and are once again assessing their long-term goals in order to help them guide their financial decisions.

            If your overall goal is to have the money you have earned make you enough money to live on after you retire, then you need to be looking beyond the stock market. A balanced portfolio with a dose of long-term investments, such as owning real estate, hedge funds, venture capital-related projects and REITs, is much more likely to help you achieve your life goals. Plus, short-term investments tend to carry headaches and heavy price tags, while longer-term investments tend to ride out turbulent markets and be priced more appropriately. Whatever the amount of financial losses you have recently experienced, remember to let your life goals play a part in your investment decisions.

Gradual Recovery, Not a Quickbound

            Many economists who hypothesized a steep, booming recovery have now changed their predictions. Historically, dramatic plummets have frequently resulted in steep recoveries. However, the current recession has the characteristics that are likely to breed either a slow, gradual rebound or a slight rebound followed by a new slump.

            The numbers for key indicators of economic growth this summer have been, at best, mixed. On the bright side, stock prices have climbed more than they have fallen, our gross domestic product is declining at a duller rate and job losses have slowed slightly. But, our unemployment rate still teeters around the highest levels reported since the early 1980s, consumer confidence fell in June and July, and homeowner vacancy remains well above the long-term average.

            Statistics aside, what we are likely to see is the emergence of a slight rebound, being fueled partially by consumer spending that cannot be sustained. Customers have been momentarily lured to the big-ticket-item marketplace because of juicy incentives such as the $4,500 Cash for Clunkers rebate and the $8,000 federal tax credit for first-time home buyers. Federal stimulus money will continue to help rejuvenate the economy for the remainder of the year, and likely on into 2010. But, when the money tanks get low, the recovery is going to once again become reliant on natural factors, such as consumer spending and successful businesses.  

            Consumers are likely to make large purchases less frequently because of new tendencies to save instead of charge. Households are saving much more than they have at any other point this decade. This is putting a muzzle on consumer spending, which accounts for around 70 percent of our GDP. Frugal customers are forcing businesses to reevaluate their business strategies. Furthermore, businesses are being required to implement money-producing techniques not reliant on excessive borrowing, which is and will continue to be rare. If consumers and businesses cannot sustain the momentum achieved by the stimulus money, then another slump will inevitably develop.

            The main initiative for the stimulus money is to breathe life back into significant economic driving forces like consumer spending or business investing. Currently, our major driving force, which is just barely keeping the economy idling, is the federal stimulus money. Throughout the end of 2009 and into 2010, we are all going to be responsible for building solid, long-term strategies that will be stable long after the federal stimulus tanks run dry. The government’s spending programs may have helped us avoid a financial apocalypse. But, without taking on the responsibility to continue moving our economy in a positive direction when the funds run out, we will soon find ourselves in another dire slump.