Sounds like it was definitely blooming then.
"probably when they captured the actual film they did it in realtime instead of using todays individual frame capturing/cleaning methods so the image didn't stay 100% in place going through the projector."
I'm not sure what method was used, but while there is a slight amount of movement, it sounds like Arnie was seeing a lot more than what is considered normal. The fact that lowering the brightness helped says a lot.
"if you encode the video to mpeg2 with in the wrong field order then any interlacing will stick out like a sore thumb,"
True, but it doesn't introduce more shaking.