FT.com : The Accountancy Column:

By promoting the fallacy that an increase in the value of an asset necessarily makes its owner better off, it has repercussions throughout the economy.

The housing market is an obvious casualty. The amount homeowners can afford to borrow depends on their ability to service the loan – normally out of income. The fair value fallacy encourages the mistaken belief that it is safe to borrow or lend, provided the loan is covered by the market value of the property. The result is a spiral of ever-increasing loans pushing up property values, which make possible ever-increasing loans. Pyramid schemes are normally against the law. Pyramid lending, however, has been made respectable by a fundamental error in accounting theory.