Option ARMs and deficit hawks

So the Obama administration is acting like we're all in the clear and setting up a budget that has some anti-stimulatory effects, a budget that assumes we're going to be in vigorous growth for the next few years. There's just one problem: We're about to have a massive hole blown into our monetary system again. Which renders all this concern about deficits rather quaint, because our real problem is that without sufficient stimulus substituting government consumption for the private consumption that isn't going to be happening, we aren't going to be able to print money fast enough to keep the economy from falling into a deflationary spiral.

The basic problem is that a huge hunk of the Alt-ARM’s come due for rate and payment reset between now and the end of 2011. As in, as huge a hunk as sub-primes in 2007. This is going to have two effects: 1) the rate resets will blow a hole in consumption as people have to pay on mortgages, and 2) a *lot* of people are going to default, driving down asset values even more. We aren’t done with this collapse in asset values by any means, and I’m suspecting that most banks are still carrying these loans at full price on their books even though they’re mostly worth maybe 60% of full price at best. That’s going to blow a huge hole in their balance sheets. You want to know why banks aren’t lending? It’s because they *know* that they have that huge hole in their balance sheets, and are frantically trying to fill it so that they don’t have to go back for another handout that would likely result in them being nationalized next time.

That’s what happens when we try to hide problems under the covers rather than fixing them. If we’d just forced the banks to mark to market up front and then taken them over for how much of their equity we had to put in in order to make them solvent again, and adjusted loan balances on those loans to real value and rewrote them to conventional fixed-rate mortgages, this would be over. But noooo, we had to pretend that the banks weren’t insolvent… and we’re still pretending. And that scares the bajeezus out of me, because our so-called leaders are acting as if there *isn’t* that huge overhang of alt-ARMs waiting to blast another hole in our banking system…

Not to mention that all the cretins are coming out of the woods to push the same ridiculous nostrums that didn’t work during the *first* Great Depression, such as the notion that 10% unemployment and 0% interest rates somehow means our capitalist system lacks resources to adjust supply to meet demand and thus we should “liquidate” yet *more* of the economy. They know this is “true” because they read it in Hayek — yes, Hayek, the same miserable excuse for a human being who insisted that the reason 1/3rd of Germans were unemployed in 1931 was because they *CHOSE* to be unemployed. Yes, Hayek actually claimed German unemployment in 1931 was caused by LAZY GERMANS! That kind of nonsense led Hitler to assuming power, because Germans knew they weren’t lazy — just as Americans today know they aren’t lazy. Yet still the cretins insist on the same old snake oil that didn’t work in 1931… and insist it’ll work *this* time. And they have some of our so-called “leaders” on their side! Inexplicable. A combination of historical illiteracy and mathematical illiteracy like I haven’t seen since the last teabagger coven.

Siiiigh! We are so, so, so f**ked.

-- Badtux the Economics Penguin