Marriott Alumni Magazine

Fall Winter 1977 Exchange

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The High Level o Pay Me Twinkies By Stephen D. Nadauld In 1964 the average interest rate on FHA new-home mortgages was approximately 5.5 percent and the rate on one-year federal government notes averaged 3.8 percent. In 1974, ten years later, the FHA rate had risen to 9.5 percent and the government note rate was 8.25 percent. Whether we are aware of these particular numbers or not, most of us have had occasion to say in our best Jim Naboresque, "Gol-lly, interest rates shore are high!" From time to time someone concerned about the level of interest rates approaches me and says, "Professor, you know about finance [their first questionable assumption), why are interest rates so high?" Usually, my initial reaction to such a question is to acknowledge their good judgment, turn, in my mind's eye, to page one of the lecture notes, push automatic pilot, and begin the "dump." The result is always the same. After ten minutes of polite boredom, the subject is changed to sports, and we both enjoy the rest of the conversation. Recently I hit upon a more efficient approach. When asked about interest rates I simply reply- interest rates are high because the price of Twinkies just went up again. The listener then laughs nervously and changes the subject to sports, and I eliminate the mental dump-time and charges. When pushed by a persistent inquisitor, I am forced to explain that the level of interest rates and the increase in the price of Twinkies really are related. In order to demonstrate the relationship (which is a serious one), consider the following example: Suppose on January 1 you had been approached by your brother-in-law who wished to borrow $100. And, in a festive mood, you agreed to the loan but stipulated that this year you would not lend

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