Fed official speaks about too much leverage

In a speech today entitled "Re-thinking Leverage Subsidies," Narayana Kocherlakota, the President of the Federal Reserve Bank of Minneapolis, (see here) argues three points:

• First, the sharp and largely unanticipated fall in U.S. residential land prices after 2006 was the main cause of the financial crisis of 2007-09.
• Second, household and financial institution leverage exacerbate the sensitivity of the financial system to declines in land prices and so reduce financial stability.
• Third, the U.S. tax system promotes leverage on the part of households and financial institutions.