Financial cycles and crashes are mostly endogenous - and there's no escaping a 2019 2020 doozy in Australia.Wealth effects matter in comprehending a modern financial economy and Reserve Bank governor Phillip Lowe braved the topic yesterday. This was the same day lame GDP growth data for 2018 arrived that will hasten the end of the dilapidated government of Scott Morrison.Anticipating  the "not quite a recession, but call it a recession anyway" GDP data release, the RBA's governor analysis of wealth effects and housing is defensive but data-driven. Lowe was speaking at the AFR summit in Sydney."My colleagues at the RBA have examined how changes in measured housing wealth affect household spending," Lowe said. "They estimate that a 10 per cent increase in net housing wealth raises the level of consumption by around three quarters of per cent in the short run and by 1.5 per cent in the longer run. "They have also examined how this wealth effect differs by type of spending. "They find that it is highest for spending on motor vehicles and household furnishings and that for many other types of spending the effect is not significantly different from zero."Part of the effect on spending on furnishings is likely to come from the fact that periods of rising housing prices are often associated with higher housing turnover, and turnover generates extra spending."Lowe explained that over recent years, "spending by households has risen at a faster rate than household income; in other words, the saving rate has declined. The results that I just spoke about suggest that rising housing wealth played a role here. "If so, falling housing prices, and a decline in measured household wealth, could have the opposite effect."The more important influence, though, is what is happening with household income. "For many people, the main source of their wealth is their human capital; that is, their future earning capacity," Lowe said, proof positive that the biggest advance in economic thought of the 20th century is embedded in macroeconomic thinking."As I have discussed on previous occasions, growth in household income has been quite weak for a while. It is plausible that, for a time, this didn't affect people's expectations of their future income growth; that is the value of their human capital. "So they didn't change their spending plans much, despite their current income growth being weak, and the saving rate fell. However, as the period of weak income growth has persisted, it has become harder to ignore it."Expectations of future income growth have been revised down "and it is likely that this is affecting spending," Lowe said."My conclusion here is that wealth effects are influencing consumption decisions, but they are working mainly through expectations of future income growth. "Swings in housing prices and turnover in the housing market are also having an effect, but they are not the main issue."Lowe concluded "this assessment is consistent with the data on housing equity injection"."Over recent years, households have been injecting substantial equity into housing and have not been