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CHAPTER 4
A Wall of Money
T
he early 2000s were a nervous, quarrelsome, time—terrorism, airport check-in lines, a discouraging war, energy disruption, nasty politics. But to be a banker, or a high-rolling investor, was very heaven. When the dot-com boom imploded in late 2000, the Fed responded by cutting the federal funds rate from 6.5 percent to 3.5 percent within the space of just a few months. In the aftermath of the tragic events of September 11, 2001, the Fed continued to lower rates—all the way down to 1 percent by 2003, the lowest rate in a half-century. The Fed did not start raising rates again until mid-2004, and for thirty-one consecutive months, the base inflation-adjusted short-term interest rate was negative. For bankers, in other words, money was free. Worries over thin capitalization at large banks in the late 1980s prompted the regulators of all major countries to impose much tougher bank capital rules. Bankers would become 59
