This ability of the Fed could be useful in the event that financial market turmoil in other parts of the world ever threatens to spread to U.S. credit and capital markets. Cutting interest rates I’ve talked about how the fall in land prices generated a sharp increase in risk perceptions in financial markets and how that in turn led to a financial crisis.
I now want to turn to what I see as the second key effect of the fall in land prices. This fall reduced the net worth of many households and firms. According to Fed calculations, household net worth fell by over 25 percent from the second quarter of 2007 to the first quarter of 2009.