Deflation, How it Happens
 

Long, very interesting read.

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And on the other hand
 

Hopefully inflation will not come roaring back like a raped ape!:eek:

Deflation's growing threat to the U.S. economy - Dec. 17, 2008

This article is dated 12/17, talking somewhat of the same possibilites of deflation. There is another article on money.cnn.com that is dated 12/18 titled "Deflation an Empty Threat (So Far)" (I don't know how to copy/paste multiple links.).

So, who's to be believed?

Good question. I try to post numerous viewpoints to give a sense of how the overall picture is constructed. As with many things in life, it is easy to find completely different opinions on any given set of circumstances.

I don't really see inflation or deflation as threats, but as a condition of the economy that is in a continual state of flux. Deciding which direction the economy is moving is the most important step in forming your own "economic policy".

Here is an article you may find interesting (if you have not read it already):

Dueling Threats

Deflation
 

It seems to me that the lowering interest rates should put the brakes on foreclosures a bit. Adjustable rate mortgages are tied to indexes that currently are diving to historical lows. As loans re-adjust it is possible that the payments could remain the same or be even lower. Hopefully this will be the bottom for the housing market and spur refinancing and home sales.

Smart home owners will use the reprisal from foreclosure to sell their home. The problem with the housing market is that there are too many home owners who can not afford the homes they are in. Somehow the system needs to be cleansed.

Skyhigh

Skyhigh,
I raise the dissent. Lowering interest rates (IMHO) may bring the very problems it sought to alleviate, recall the Greenspan cuts of 02-04. The problem with an ARM is that the real value of home was much, much lower than the psuedo-value. Lowering interest rates will only raise the psuedo-value of the home and allow for increased demand, thereby starting the cycle over again. This is, of course, is only true if the "liquidity trap" does not exist in this context. The question for homeowners (rather home-borrower) will be where exactly will all this new liquidity go? There probably will be another demand-bubble because of it. We will see how those with the new liquidity handle the upcoming situation.

The rates won't matter for many-they should have never gotten a loan. For others it is a problem because banks are now using a more realistic valuation and potential refis are under water at that point.
Here is a good article on WAMU and how their business model was based on very careless lending.

http://www.nytimes.com/2008/12/28/business/28wamu.html