[jbooth]

Well, mortgage interest rates are based on inflation plus a couple points so the bank still comes out ahead. In the early 80s, inflation was around 10-15%, hence an 18% mortgage. Now, it's more like 3-4%, hence a 5-6% mortgage.

Maybe they've made some bookkeeping and overhead improvements that allow them to add a point less or something like that, but it's not like they had some genius idea that allowed them to lower from 18 to 5.. it's just tracking the inflation rate. (and/or the fed funds rate which is related to inflation).

(Side note: my ATM snark was stolen directly from Paul Volker, who was the guy who stopped inflation in the late 70s early 80s by jacking up the fed funds rate. Credit went to Reagan of course. Better hair.)

[stretchwithme]

Rates are not directly dependent on the inflation rate. Yes, in the real world they are, but the Fed can set them wherever they want and have been doing that.

In fact, the lower the rate, the more we all borrow and bid up prices for things. Most of that inflation since 2001 has been in things that the government likes to overlook, such as oil and housing. But the inflation does actually exist, whether they wish to ignore it or not.

Going to market rates would go a long way to fixing the distortions, to be sure. But many things would not survive in that environment and have only been viable because they've been able to shift the true cost via inflation to the larger economy.

[jimbokun]

"Credit went to Reagan of course. Better hair."

Credit went to Reagan for selecting Volker and letting him do his job.

[jbooth]

Carter selected Volker.