So you might think that we have weathered the storm of foreclosures and now just need to wait for the recovery act and the economy to heal itself. After all, we hit bottom in this mess, right? The only looming economic disaster is a debt problem that the right keeps shouting about. Think again! We're not even fully halfway through this disaster.
The sub-prime mess created a one trillion dollar hole in the economy. George W. Bush filled that hole with the seven hundred billion dollar TARP bill right before leaving office. While it's true that the sub-prime issue is pretty much done there is a time bomb that is going to explode in the next year worth 1.5 Trillion dollars.
What am i talking about? It's called an Option-ARM mortgage. It works a lot like a credit card does. They bring you in with teaser rates, sometimes as low as one percent and a low monthly payment. But that's the thing about teaser rates, they inevitably spike up. And that's what they are doing right now and they are going to max out probably this time next year. It seems as though people are already defaulting on teaser rates so when the rate spikes and the monthly payment goes from $800/month to $1700/month we can expect much higher default rates than right now. This is what will cause the double dip in the economy, but it comes with more dangers.
It comes with more dangers because the conservatives are right in the fact that we can't keep printing money and bailing out banks. We can't fill the holes. More banks are going to become insolvent and there will be a greater credit crunch. The credit crunch will become only worse. Right now the Fed is practically giving money away to try to jump start the economy. The economy will not sustain these artificially low Fed rates for much longer before the Fed has no choice but to spike the rates further increasing the credit crunch. This will inevitably lead to more and more businesses to not be able to get the credit they need to stay in business, or expand and hire. This will likely cause a new unemployment spike.
There are other dangers to watch out for in the future too. College graduates with $50,000+ in student loans may graduate from college and find no jobs on the other side. They won't be able to pay back those loans. Credit cards too are a danger. Insecure debt is a cancer on anyone's finances, especially when they have no work.
The next two years may very well determine if this is the great recession or the second great depression.