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Bottom's Up

Super-low interest rates made us brave spenders, hid the recession, and even helped keep political peace. But good-bye to all that.


One year after cutting the federal funds rate to the modern-day low of 1 percent, and four years after embarking on a protracted game of interest-rate limbo, Federal Reserve chairman Alan Greenspan finally raised the interest rate he controls. Widely predicted for months, the increase was perhaps the most anti-climactic scrap of news to cross the tape since Nathan Lane came out. And though it was but a mere quarter of a point, the hike is likely to be the first of many. “When rates reverse, they typically start going in a new direction,” says James Grant, the proprietor of Grant’s Interest Rate Observer. If this is, in fact, what comes to pass, the implications for New York City—at least the version of it we have known and grown comfortable with over the past three years—could be dire.

Just as the Wall Street boom defined the eighties, and the dot-com era branded the nineties, the first half of this decade can be considered the era of cheap money.

The long-term cycle started way back in the early eighties, when Paul Volcker, the cigar-chomping Federal Reserve chairman, launched a jihad on inflation by jacking up interest rates into the high double digits. (In 1980, my bar mitzvah money went into a Dreyfus money-market account that yielded about 18 percent.)

After generally falling throughout the eighties and nineties, with some upward bumps along the way, rates plunged in the past few years to record lows.

Many factors were responsible: a recession and anemic recovery, rampant productivity, and the widespread disillusionment with stocks after the dot-com crash. Above all, we’ve had a Fed chairman whose preferred response to virtually every crisis—from the Asian meltdown of 1997 to the 9/11 attacks—has been to lower the price of money. Last June, fearing deflation, Greenspan took the federal funds rate to 1 percent—down from 6.5 percent in May 2000—and left it there.

New Yorkers will start to scrutinize restaurant bills more closely—“That’s your $18 martini”—and think twice about Anguilla in February. Fort Myers is warm then, too.

Such low rates, of course, were accessible only to banks like Citigroup and Goldman Sachs. But ultracheap money for the few translated into cheaper money for the masses, a verifiable case of trickle-down economics. Thirty-year mortgage rates fell from 8.5 percent in 2000 to below 6 percent last year. The Big Three automakers rolled out unprecedented zero percent car loans in the fall of 2001.

But it was in New York that the effects of cheap money were most visible and far-reaching. The city is populated with more people, companies, and public agencies that borrow and spend than anywhere else. It houses the industries for which low interest rates are a license to mint money—bond-trading notably, as well as the securitization of mortgages and other financial instruments. And because housing costs more here than virtually anywhere else in the country, and because people borrow heavily to buy it, New York real estate was among the nation’s greatest beneficiaries of the era of cheap money. The city has been awash in cash in a way that we will come to appreciate ever more deeply as Greenspan begins to tighten the spigot.

over the past three years, super-low interest rates offered a psychological salve for New Yorkers who found their nerves frayed by 9/11 (and by that suddenly smaller matter of the dot-com collapse). For many of us, spending became a kind of therapy. We took the windfalls from mortgage refinancings and hastily blew through them: on $300 meals at Alain Ducasse, on spa treatments and trips to the Ocean Club.

Nationwide, inflation may have been muted. But the cost of daily life in Manhattan rose spectacularly: 95 cents for a Gray’s Papaya hot dog, $2.50 for a gallon of gas, $10 for a movie ticket, $100 for a Producers ticket, $16,000 for nursery school. We accepted the higher prices with alacrity because cheap money acts as the ultimate absorber of sticker shock.

Cheap money also paced the relentless march of the Upscale. Whole Foods replaced the Korean grocer as the supplier of choice for produce. Barneys revived from its long post-bankruptcy slumber. The $40 Gap button-down gave way to the $130 Thomas Pink in the closets of middle management. On the Lower East Side, dining used to mean a $3 falafel and a $1.25 Snapple. Now it’s the lamb with aged goat cheese and hibiscus date purée ($30), accompanied by a 1999 Meo-Camuzet Bourgogne ($48) at WD-50.

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