OUR GEE WHIZ MORTGAGE.

OUR GEE WHIZ MORTGAGE. Another reason that the inflation from 1979 to 1982 was felt acutely by individuals was that the Federal Reserve tightening of monetary policy was reflected in high interest rates. A nominal interest rate of 14 % seems enormous even if the rate of inflation is 14% and consequently the real interest rate is zero. (The Fed was severely criticized at the time for high nominal interest rates even when real interest rates were low).

The high nominal interest rates affected us directly. Our first mortgage, taken out in June of 1982, was the kind of mortgage which was much criticized (and correctly) as leading to the mortgage crisis of 2007 to 2009. It had a floating interest rate which was reset every six months based on changes in a national interest rate index. The initial interest rate was sixteen and one half per cent (that is, greater than 16%). Kids, you will note that it could have floated higher and higher. It also had other features, including a provision for “negative amortization”, which would have permitted unpaid interest to be added to the principal amount owed. I was comfortable taking the risk because I was an interest rate optimist (or you could say it was because I was reckless). In the event, the interest rate went down to 12% at the first reset and continued to decline sharply as interest rates and inflation declined. I have vivid memories of the success of the Fed policies from 1979 to 1982.