Magazine article Real Estate Issues

Kairos -- the Critical Moment -- Comes to the Economy

Magazine article Real Estate Issues

Kairos -- the Critical Moment -- Comes to the Economy

Article excerpt

For the Winter 1999/2000 edition of Real Estate Issues, I titled this column "The End Isn't Near... But Repent Anyway." The theme of that essay was that, as the economic expansion of the '90s entered the history books as the longest period of growth in recorded U.S. annals, there were some soft spots that needed attention. One of the caveats explicitly stated, "With the Japanese model squarely before us, we need to consider the helium-powered stock market and the potential consequences of Wall Street running out of gas in the near future." The piece concluded with a biblical injunction, "Be watchful. You do not know the day or the hour. The best insurance against the ill effects of a recession, after all, is to anticipate that you will one day need to cope with the downturn. The best time to start that planning is now."

So, how did your planning go? We are now at a critical point for the economy, and the events that transpire during April and May of 2001 will likely determine whether or not we are in for the first recession since 1991. The ancient Greeks had a term for such a moment, kairos. The line from the bible, alluded to above, comes from the 13th chapter of Mark's Gospel, and in the verse that says, "You do not know when the time will come," the Greek word for translated "time" is not chronos, the usual passage of days, but kairos, the critical moment.

Recessions are fomented by excesses, and serve to correct them. While we have had a rather tame Consumer Price Index deep into the growth cycle, this does not mean that we have been without inflation. Without a doubt, equity values in the stock market were inflated in late 1999 ("helium-powered"), measured by price-earnings ratios, by dividend yields, and certainly by speculative expectations that anticipated a "Dow 36,000" over the horizon. A simple definition of inflation is "too much money chasing too few goods," and that was as good a description as any of the climax of the bull market on Wall Street just a year ago.

Will we have a recession in 2001? There is no certain answer to that question in early April as I prepare this column, but by the time Real Estate Issues arrives in your mailbox we should have a pretty good idea. A great deal depends upon just a few variables, and how they behave at this moment of kairos. In Table 1, I chart those variables as I see them and suggest that by Memorial Day the die will be cast for the end or the continuation of the economic expansion.

The decision tree begins, as it should, with the Fed. At its March 20th meeting, the Federal Open Market Committee cut the central bank's discount rate by 50 basis points, to 4.5 percent, in the third such reduction in 2001. The financial markets had hoped for a 75 basis point cut, and reacted immediately by displaying their disappointment. I had felt that a full percentage point cut should have been made, under the theory that such a decline will be ultimately necessary and that there was little to gain in doling out the stimulus little-by-little, but saw zero chance that the Fed would seize the moment for such a historic move.

The FOMC, in its wisdom, looked at the mixed signals emanating from the economy in the early months of the year and decided that a steady but moderate diet of stimulus was justified. The Fed believes, from long experience, in the efficacy of its policy moves and understands that a lag of six to eight months is normal. It is rare that a three-step, 150 basis point intervention in the price of money does not have the desired effect. There is no evidence whatsoever that the central bank is seeking to precipitate a recession, and every reason to think that it will do what it thinks necessary to craft a "soft landing."

But the Fed, while powerful, is not all-powerful. And its economic vision, while acute, is not omniscient. On a policy basis, Greenspan and colleagues apparently felt it sent the wrong signal to "put a floor" under the stock market. …

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