OK, this is gonna be a long 'un.
Basically, the situation with my husband's parents is really getting me down. I really don't know what the best thing to do is and my head is just going round in circles.
Some background for you, so it all makes more sense; I've been with my OH for nearly 10 years, since we were kids, and throughout the whole time he's never been close to his parents. His mum in particular is a tyrant and would regularly get drunk in the evenings (and sometimes days) and tell my OH and his three siblings that she hates them, that they have ruined her life and she can't wait for them to have kids so that they will hate them too.
She was seeing a counsellor for a while but it almost made it worse as she would come home and say that the counsellor agrees with her that they are evil and selfish. The kids were definitely none of these things, but my OH would often stand up to her and look after his little sisters, so she hates him the most.
I remember she said she was keeping your youngest daughter (11 at the time) fat on purpose so she would be like her.
Anyway, there is a vast catalogue of spiteful things she has done and said to her children over the years, and as soon as my OH was old enough, he moved in with me and my parents, who treat him like a son.
So fast forward 10 years and we are now married with a little baby girl and very happy, but since she has been born I have felt really strongly that I don't want them in our lives. Before she was born there were some big fallings out in his family, and my OH warned them that one more fuck up and they wouldn't see us again.
Some examples of recent things they have done which upset me:
When my OH went round there to tell them I was in hospital having a miscarriage, his mum said 'oh great, that's another one of my kids who can't use contraception'.
My OH's brother had an affair and left his wife and three kids (our nieces and nephew), and we went to visit the kids and his ex wife (who was having chemotherapy at the time), which made us 'selfish' and 'taking sides' and 'think we're too good for them'.
She frightened my niece by telling her that her mum (the ex wife) was evil and had gone mad. (She hadn't, she had gone home to her family to get over the break up and recover from an illness.)
Complained that they weren't involved in the wedding and were being pushed out, so my OH asked her if she wanted to help him buy a suit and she shouted at him and said he owed her £100 from three years ago.
Threatened not to come to the wedding a week before, while I was 7 months pregnant.
Came over to house after Lily was born, snatched her off my OH and turned round to me and said 'put the kettle on'.
Basically, I've just had enough of them. I don't want to know them and I don't want Lily to know them. I don't feel like she would missing out as we have a large and happy extended family as it is, and I also just can't bear the idea of them playing happy families and having no accountability for their actions.
My OH has been great, and has always told them they are in the wrong etc, but he think I am overreacting now and he says they have no say over our lives at all and we only see them very occassionally and he wants to leave it at that. I can totally understand where he's coming from, but I literally can't bear the thought of them getting close to Lily.
I have said one more thing to upset me and that will be the last of it, but it seems like it's been 'one more chance' for years and I've had enough of it.
I don't think they will bring one positive thing into Lily's life.
There's also the complication of his extended family, who would find it very hard if we cut out his parents. I think everyone needs to break free from his mum to be honest, and do what they want to do and see who they want to see in life, but I do understand that it would be hard for them.
My OH went to see them at the weekend and his mum said she is going to buy Lily a Halloween outfit. It's making me upset now thinking about them coming over and wanting to dress her up, and acting like everything is normal and it's not. They've ruined it. I don't want them near us. If they ever ever upset Lily it would be my fault for allowing them.
What do I do?

Would it create just too much family drama if I cut them out, would that be harmful to Lily in the long run? Do I carry on as we are, just seeing them the bare minimum, and just get over my feelings about it?
What would you do?