Daily Reckoning: ARMS and Interest Rates

The Daily Reckoning: ARMs and Interest Rates

"I sing of ARMs and the Man..."
-
Virgil's Aeneid

We don't really have that much more to sing about ARMs, dear readers, but we just couldn't resist the headline.

Still, now that we think about it, our cautionary tale is likely to end just as bloodily as any epic poem we've read. Imagine what would happen if mortgages were adjusted upwards to rates anywhere near 10% - or any where near where they were 25 years ago?

That is why the Bernanke Fed cannot really fight inflation or stagflation the way Paul Volcker once did. Too many homeowners wouldn't be able to afford it. ARMS were meant to give marginal borrowers flexibility. Instead, they have locked both the borrowers and the Fed itselfinto...well, leg-irons. The borrowers have no margin. Most cannot affordeven the slightest boost in their payments. And with such boosts now automatic, the Fed can only react to inflation threats by prevaricating.

According to David Rosenberg at Merrill, discretionary items are now rising at a 5% annual rate - far beyond Ben Bernanke's target. But what can he do?

ARMs were supposed to be a way to realize the American dream of homeownership. But, like much else in American life, that dream too has been hollowed out.

The Daily Reckoning is a an excellent read. Currently, they are very bearish.