Option-ARM with 12 Zeroes?

The Mother of All Re-Financing Risks?

Taking on new debt is an action that has implications for the true cost of the U.S. government's financial rescue initiatives. This cost may have significant refinancing risk."

--Special Inspector General Neil Barofsky

Let's see . . . one of the main story lines of the housing bubble involves millions of borrowers scooping up easy, short-term money -- from creditors more than happy to dispense it -- based on the belief that they could easily refinance on favorable terms.

Unh-unh.

As we all now know too well, housing stopped appreciating, the credit spigot got turned off . . . and millions of homeowners got stuck with spiking mortgage payments.

Now, to mitigate the fallout from the housing bust, the U.S. government is issuing trillions in (for now) dirt-cheap, short-term debt.

Thank you, Alan Greenspan (it was Greenspan who said the Fed's job was to mitigate the fallout from burst bubbles, not to prevent them).

So what happens if all that debt can't be rolled over on easy terms?

Unlike individual households, the government can always print money to repay its obligations.

But creditors who are wise to that: a) refuse to lend; b) require rates significantly higher than zero (what the Fed is able to pay now); or c) both.