So far, however, the influence of the adjustments in the housing market on the economy has been limited. Labor market conditions remain tight, with a marginal slowdown in employment gains. In this situation, the pace of deceleration in private consumption has been moderate, supported mainly by an increase in household income.
Let’s just look at what the mark-to-market valuation principles have led to. By definition, mark-to-market valuation principles are procyclical since they inflate the value of an asset in an upswing and bring it down in a downturn. Thus, they accentuate the volatility of bank balance sheets.