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alstry (< 20)

Are Economists Rational?????



July 08, 2009 – Comments (6)

Scott Grannis is a well known Economist with a very respectable Economics Blog:

I strongly recommend his blog for those who like Economic issues.

Scott wrote a blog yesterday titled:  Used Car Prices Soar 

In his blog he states:

I think the rise in prices also has something to do with the return of money velocity. Consumers retrenched violently in the fourth quarter of last year, hoarding cash and repaying debt in the face of tremendous uncertainty. Money velocity collapsed. Now that confidence is returning, money is getting spent again. The economy is recovering some of the ground it lost.

My response was as follows:


Not a chance.

My buddy is in the industry and I have attended used car auctions. And yes, used car prices are WAY UP at the auction. Even big SUVs. But not for the reasons you state.

It is very difficult right now to get new car financing. The margins for used cars are soooooo high that they are self-financed in many cases.

If the car must be taken back, there is enough margin built into the sale to make the deal still work.

The primary reason used cars are selling is because it is very difficult to get new car financing. Plain and simple, and sort of a strange byproduct of the times.

His response to me was....

alstry: Your argument boils down to this: used cars are very cheap relative to new cars. That explains the surge in demand for used cars. We are reversing the slump of late last year which left used car prices way too cheap relative to new car prices. As I'm arguing, the world is returning to normal.

Actually that was NOT my arugment to Mr. Grannis.  In fact, my argument was exactly opposite, that used cars are expensive and are selling because buyers can get financing for them due to the very high margins built into the car, despite being over priced......not much different than when anyone with a pulse could get financing on over valued houses during the bubble years.  Heck, in some cases, used cars are selling for higher prices than new cars soley because they can be financed at such high prices.

Based on the fact that the President and Congress is relying on a bunch of Economists to solve this financial mess, you think it may be a big reason why the mess is getting worse!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

It is seems that Economists have very little understanding of leverage and its important implications on the Economy.......little wonder why our nations economic health is rapidly entering the critical stage.



6 Comments – Post Your Own

#1) On July 08, 2009 at 7:17 AM, Entrepreneur58 (37.53) wrote:

I don't know much about the car finance business, but why would it be easier to finance a used car than a new car?   Why don't the car sellers mark up prices on new cars and offer easier financing the way they do with used cars?  I've noticed for the last several years that new cars are better deals than used cars and have switched from buying used to buying new.

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#2) On July 08, 2009 at 8:59 AM, alstry (< 20) wrote:

Sellers of New Cars buy their  cars  from manufacturers.  For the most part, they pay a much higher price for new cars and are not as profitable as selling used cars.  In addition, the attractive finanicing we see on new cars is often subsidized by the manufacturer.  Lately, such financing is only available to a select group of borrowers leaving many out in the cold unable to finance the purchase of a new vehicle.

Since relatively few Americans can afford to pay cash for their vehicles, they are forced to purchase a vehicle they can finance.

Generally car dealers buy used cars at lower cost and have much more room to mark it up.  The greater the mark up, the more incentive  the  dealer  has to self  finance the car.....even if the borrower defaults, the dealer has enough margin built in to make the loan which would not be present in a new car..

Remember, many Americans simply base their purchases on monthly payments and not purchase price.  It gives sellers lots of creativity in pricing when pricing a product and lots of room to manipulate sales prices.

The fact that new cars are getting harder and harder to finance, selling used cars is becoming easier and easier, even if they are more expensive.


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#3) On July 08, 2009 at 9:23 AM, GNUBEE (< 20) wrote:

Lets not forget the overall difference in price for "used". I say used because you'd be hard pressed to find any discernable difference between a new and 2 year old car. With people in "spend less" mode they may view the used car as 95% of the new car, at 65% of the price. Just like clipping coupons and home gardens are in vogue, people may be rethinking buying new cars.

But I will conceed that joe sixpack is probably having difficulty buying that new car and may be forced to look at used. Those two together make for a surge in used.

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#4) On July 08, 2009 at 9:28 AM, alstry (< 20) wrote:


The key is finanicing.  If Joe Six pack can't qualify to finance a new car, and he needs a vehicle, in some cases he will be forced to pay a higher price for a used car than he will for the same model new one.

The market is bass acwards, it is the availability of financing that is driving price....not whether the car is new or used.

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#5) On July 08, 2009 at 10:15 AM, cudakhan (23.28) wrote:

The system is dysfunctional, so much for the idea that the stimulus is going to thaw the credit market.  This is another example of how the banks artificially alter the value of things.  Didn’t we learn anything from the housing meltdown?  Anyway, the average person is financially overextended, with the continued decline in housing prices americans will be unable to expunge the deluge of poor ( and impulsive) financial decisions.

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#6) On July 08, 2009 at 10:20 AM, GNUBEE (< 20) wrote:

I think it's both the financing (major factor-forced) and decision making (minor-choice). So those that cannot choose (financing) are forced to buy used. Those that can chose are making more financially sound vehicle choices. So the initial "fork in the road" for the "I want to buy a car, what are my choices" both point to used.


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