Sounds pretty strange... Since it can obviously talk to the PC through the serial port as you said you could download programs... Things I would try include:
a) Run the PS2 test program... Which is part of this tutorial (http://www.lynxmotion.com/images/html/build034.htm
). I would try to see if it would output in one of the Terminal windows that is part of the Basic Micro IDE. I would then try other terminal programs as well. Double check right comm port, baud rates... are selected.
I would also double check wiring. Although you did mention you undid everything... Do you have a speaker hooked up to your Arc32? I often have one of the radioshack cheap speakers hooked up. Maybe the Arc32 is hung in the PS2 init...
That is all for now.