Cash For Clunkers – Bottom Up vs. Top Down

It’s always nice to hear the words, “You were right.” Last weekend, during a family visit, my brother-in-law came out of nowhere with that statement. For a moment, I had no idea what he was talking about but he refreshed my memory with a previous conversation we had about that the problem with the government bailout. My main argument was focusing on the banks and that the bailout was “top down” and “not bottom up.”

Specifically, my brother-in-law, Howard mentioned that the Cash for Clunkers program was the first program in the federal bailout where money was actually going to the people and then trickling up instead of, in theory, trickling down.

My brother-in-law had previously recalled that I have been long advocating that the funds for the real estate bailout not go to the banks, but that the funds go to individuals. In this case, the individuals would then be obligated to use that money to pay down their mortgages and thus provide the banks with a reinfusion of funds that would then be required to be used to make new mortgages to other homebuyers.

At least until now, the real estate bailout has focused on providing funds to the banks who were free to use that money to unfortunately pay lavish bonuses and purchase other banks. The funds, of course, were supposed to be used to lend money to homebuyers, but as we all know, to a large extent that has not happened… as of yet.

Thus it is a bit ironic that the Cash for Clunkers program has already run out of funds and while the House has approved the measure, the Senate has not yet agreed to a replenishment of funds. In all likelihood, the Senate will replenish those funds because of the sense that the Cash for Clunkers program is not only helping the car industry but is helping everyone in the economy. In fact, arguably, the Cash for Clunkers program is indirectly helping the foreclosure problem since many of the sales people in the car industry were likely facing foreclosure if their commissions did not return. With the Cash for Clunkers program many of these salespeople are now at least getting some money back in their pocket and have a chance to get back on their feet.

Ironically, the program is so simple that even an 11th grade economics student would understand how giving money to people to buy new cars is better than having the funds stuck on Wall Street.

While the government may argue that the first-time buyer incentive of $8,000 is similar to the Cash for Clunkers program, in fact, it is not. The $8,000 tax credit is complicated and requires one to have income. The Cash for Clunkers program is simple, you bring in your clunker and you get cash back when you buy a new car.

A bottom-up approach in handling the foreclosure crisis would be nothing new. FDR came up with a program that effectively lent individuals money to pay down their mortgages so that they would no longer be underwater. The foreclosure crisis to a large extent is a function of real estate prices. Of course it’s also now a problem because of the high unemployment rate; however, if real estate prices stopped falling and began to stabilize, many people would be able to find work again.

So I hope the Senate will do the right thing and extend the Cash for Clunkers program and then maybe take a breath and realize that sometimes simpler is better and that they should use the same strategy in the Cash for Clunkers program to try and create a bailout program for the taxpayer that really involves the taxpayer.

While in theory I have never been a big fan of trickle down I think we have strong evidence here that trickle up is much better and more universally applauded and accepted.

From the Trenches,
Roy Oppenheim