ARM loans can be good. They are absolutely not the cause of the breakdown in the market. The breakdown came from greedy banks giving people loans they could not afford.
ARM is a roll the dice loan. Your rate is determined by the market(and your ability to pay on time), not by some guy in a bank that says, hmmm lets raise his rate cause we can. Unless you didn't have a lawyer look at your loan, you aren't going to get that.
i'd argue that the blame is equally on the consumer agreeing to the loan. you're taking out a huge sum of money and dont take on a basic understanding of how the loan works?
in full disclosure of that penfed loan, the cap is not 4.5% but 7%. 5% max from the original rate with a 2% cap per change. so would take min 15 years to reach 7% at the max rate rise.
if the plan is to prepay and payoff in 10 years, particularly with a large prepay before year 5, the monthly payment would be drastically lower than a fixed rate at the 5 year rate change.
sure the interest rate is higher but you paid less than normal closing costs to get a lower than fixed rate, to allow more prepayment per monthly cycle, and at 5 years the monthly required payment is going to be far less than the fixed rate should you need to divert money elsewhere.
there's a place for arms and it can be beneficial in the right places. it's not good for someone who only wants to pay the minimum over a 30 year span. it can be very good for a prepayer. whether one should prepay or not is a wholly different question all together