Yes, government debt, but also inflation. Especially if as you say the Fed keeps ZIRP in order to protect the banks that suffer losses from the resets. You speculate as to their ability to pay on these mortgages (the home owners), but you really don't know. If real unemployment remains, barely improves or in fact worsens, there is no way to be so confident that these resets won't be devastating.
Actually that's false. Many of the mortgages still set to reset were teaser rate loans, in which case the payments will shoot up big time. Don't forget that most of the folks who got these loans, even the more credit worthy ones, got them during the frenzy of the RE bubble, and I'd wager that most of them didn't worry about when the mortgage was going to reset and whether or not they'd be able to pay the new payments, because they figured the property would have appreciated big time by then and they'd have already cashed out or been able to refi before that happened. Then add in the current unemployment picture, and it gets even worse. While I agree that government debt will be another brick in the crisis wall, I strongly disagree that the banks will not be clobbered yet again by this next wave. If you'll recall, Japan's central bank cut their lending rate to 0 and that didn't prevent many Japanese banks from getting crushed by further debt defaults. Whatever profits banks can make on the lending spread will be swamped by the losses and writedowns they'll be taking on their balance sheets. As the old saying goes, the four most expensive words in the English language are "This time it's different". It's not.
Not really. At best what it would mean is we'd simply repeat the Japanese experience, i.e. drag the collapse out over a much longer time frame than it otherwise would have been.
The part that you're missing is it's not just the mortgage defaults themselves that are the problem, it's the leverage derived from them that levers the risk up by an order of magnitude. The whole OTC derivative market is still very much alive and kicking and all those CDO's, CDS's and other alphabet soup of esoteric derivatives based on these mortgages are still lurking out there, and in some cases, have been added to since the first round of the crisis. It's not the mortgages themselves blowing up that is the danger, it's the mortgages blowing up and taking the derivatives with them that is the real danger. It's why the subprime blowup brought the financial institutions to their knees despite (as the graph shows) nominally not being a huge number in and of itself. Now add this time around the subprime, plus Alt-A, plus commercial, plus option arm plus prime resets all still backed by derivative instruments, during an economic period where unemployment is much worse than it was when the first round of subprime blew up, and you have a pretty explosive cocktail.
So now that I make the point that losses are likely realtime much less than this chart, the best you come up with is the "unknown derivative leverage" argument? The delevering happened. DTC data showed outstanding cds/etc contract by 50% (something like 60T to 30T) when this happened. That is yesterday's story, and the probability of repeat is minimal. Thru the AIG funding, the one time catastrophe you are referring to was averted. The next future blow-up will be somewhere else, I guarantee you. These credit suisse charts don't qualify as research anymore - they have long been in the mosaic of public info and those risks and positions have been hedged/dumped/profits taken.
Has nothing to do with what I "come up with". The facts do not require you to agree with them for them to be true nonetheless. I'd suggest you take another look at the data from the BIS, then. The notional value of CDS's alone is only now slightly lower than it was when the crisis began. And total OTC derivative values are actually higher now than they were before. And you base this on what evidence, exactly? While I agree that there are plenty of other black swans out there that can and will conspire to cause the next leg down in the economy and markets, dismissing the next leg of mortgage resets and defaults as already "accounted for" is a major mistake IMO. But I guess we'll just have to wait and see how it all plays out, won't we?
1. Crisis was definately not a figment of our imagination. It was the effects of 'unintended consequences' stemming from Bear/Lehman's handling. 2. Next shoe to drop very possible. But it always has been, so difficult to precisely anticipate. 3. Slow grind seems to be reasonable - we are following Japan's pathway after all, just in a more concentrated fashion, and without the demographic disaster facing that nation. 4. Sovereign defaults by the US unlikely minus total war in which we lose. At which point, preserving your wealth will be the least of our worries.
the option-arm problem won't be as severe as the subprime problem because subprime loans had much higher margin rates. because option-arms for prime borrowers have much lower margins, and because the fed is hell bent on keeping rates low, the loan recast won't be as significant. there are option-arms with a fully index rate around 3.5%. even with re-amortization, the new monthly payment won't rise as much as it did with subprimes. it will definitely be a problem for many borrowers, but not on the epic scale as with subprimes.