1) People driving older cars, have lower insurance rates
....and most likely no monthly car payment.
2) Now they have an attractive carrot dangling in front of
...them with this possible $4500.00 prize.
3) If they had to drive older cars due to lack of money
...what makes them think they can afford higher insurance
....in addition to a new monthly car payment?
As you noted, the whole Cash for Clunkers boondoggle is really a scheme to encourage consumers to get back in debt. No doubt the govt. and their friends in large banks are alarmed that many citizens have realized that paying thousands of dollars in interest to banks to have a new car is a bad idea.
For many consumers they'll end up paying some bank way more in interest than the $4500 they get from the government. And the return on investment from buying and financing a new car just to get slightly better mileage is negative for the consumer.