Thursday, May 7, 2009

Cash For Clunkers: (Not cars, I mean banks)

Two developments happened over the last two days.

The House of Representatives passed the oddly named, but very smart "Cash for Clunkers" bill, which will give cash vouchers to people who turn in their low mileage vehicles for higher mileage ones. According to the "Detroit Free Press," the vouchers would be worth $3,500 if the mileage improvement is at least four miles per gallon for a car or two miles per gallon for a small truck, and $4,500 if the difference is 10 miles per gallon for a car or five miles per gallon for a small truck.

In both cases, the old vehicle must get less than 18 miles per gallon, and new cars must hit at least 22 miles per gallon for a car and at least 18 miles per gallon for a small truck.

"The upgrades in mileage may not sound huge, but if the program spurs a big turnover in the vehicles Americans drive, both oil consumption and climate warming emissions could decline substantially. And the standards have to be accessible for most Americans -- otherwise, even vouchers of this size might not lure many buyers."

To my point on banks. The stress test results are released after markets close tomorrow officially, but we all know the deal: They need another $65 billion to weather the storm. They may raise private capital (good luck with that) or convert government-held preferred stock to common, which means we, the taxpayers, become even bigger shareholders in the banks.

Those stress tests were based on assumptions on the economy that many say were a tad optimistic. I'm dying to know if they envisioned a collapse of the U.S. auto industry. The storm they are supposed to weather will go from a Category 1 to a Category 5 if the U.S. auto industry does not survive, people, and anything that stimulates sales is a pre-requisite to that survival.

Since the banks will be clunkers if we don't get the autos back up and running (one in 10 jobs is tied to the industry), then we should first pass the Cash for Clunkers as a standalone bill. Getting Main Street straight is the key to the Wall Street's ability to weather the storm, or else we shouldn't consider putting more cash in clunker banks and consider Chapter 11 reorganization for the banks, too!

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