File the “cash for clunkers” bill under “we never learn”.

The last time I checked, there were a lot of pretty smart people making a pretty darn compelling argument that this whole recession is a “chickens coming home to roost moment”. We’re paying the piper now for a long debt dance during which people financed homes they couldn’t really afford and lived with little plastic cards clutched tightly in their hands. We overextended as Jane and John Doe. The big banks went too crazy. Everyone ran around writing checks that they couldn’t cash and finally the entire credit-based artifice began to crumble, crushing many underneath the rubble.

So, what would the smartest possible reaction be to all of the mayhem?

I’ll tell you what it wouldn’t be… It wouldn’t be a government program designed specifically to encourage people to make large purchases on credit.

I mean, really, if you said the best way to create a sustainable economy involved increasing consumer debt loads, you’d be a laughingstock, right?

Wrong. Enter the “cash for clunkers” law.

This legislative gem provides folks who are driving fuel-inefficient used cars with a voucher worth either $3500 or $4500 (depending on the car’s mpg rating) to use toward the purchase of a brand new chunk of American steel!

Now, as you’ve probably noticed, new cars tend to cost more than $3500 or $4500. The Yugo is long gone. Even the el cheapo, no features standard vehicles run around twice the max voucher amount.

So, you’re tooling around in a 1990 Continental featuring a primer gray, yellow and red color scheme due to the previous owner’s affinity for fender bending fun. You’re sucking gas like a dehydrated guy holding a Super Big Gulp. Even if the car had tires with tread (those little wires poking out don’t count), it wouldn’t be worth $3500. But now, you can get a $4500 voucher to put towards the purchase of a brand spanking new Chevy Cobalt.

Where are you getting the balance of the money? Well, duh, the helpful people at GMAC Auto Finance will loan it to you. Or someone else will. Some dummy will spot you the extra moohlah, even though you might end up paying fat interest on the loan.

End result? You just added big ol’ chunk of change to your debt load. Instead of owning your Continental outright, you’re working part of every day just to pay GMAC.

Now, we can probably assume that you don’t have a ton of cushion in your monthly budget. Most folks limping along in rustbuckets aren’t living the high life. Thus, when something BAD happens (and it will), you’re going to have an issue making that car payment. Or you’re going to stiff someone else. Or you’ll go hungry (which seems like a high price to pay for a Cobalt). Odds are that you’re going to be trying to find a way to stave off the repo man when you become the unlucky person who officially pushes us into 10% unemployment.

More debt without more income? Bad. More debt in an already “iffy” economy? Bad.

Plus, cars are a miserable investment in the first place. Depreciation is faster than a new Mustang.

So, the cash for clunker law exists to encourage people to increase their consumer debt by purchasing an item that will lose value before the ink on the loan agreement dries.

Wow.

And that’s not all. It’s going to mess with the market value of older cars, artificially increasing their value and making them harder for the working poor to afford. It’s the worst kind of economic engineering.

The silver lining? It might not make a difference. It might be that the reeling credit industry won’t bother writing loans on new cars for voucher holders, anyway.

So, the cash for clunkers law would either make things worse or have very little real impact whatsoever. A loser either way.

If you want to read about the details of who can get what in exchange for what car and other assorted fun facts about this bit of foolishness known as “cash for clunkers,” check here.

Some other good reading: Elizabeth Hovde and I don’t share the same overall political perspective, but she’s so right about this law that I almost want to kiss her.