At its peak, the housing bubble created more than $8 trillion in housing equity compared to a situation where house prices had just followed their long-term trend. People consumed based on this wealth, exactly as economic theory predicted.Sadly, nobody in power in Washington has yet named the above as villains responsible for the Little Depression of 2008-??. Instead, these people still have sway along with other miscreants like Tim Geithner (promoted to Secretary of the Treasury for his "services" in creating the current mess) and Larry Summers (who was promoted to head of the US National Economic Council). Meanwhile, those who fought valiantly to stop the insanity, like Brooksley Born who was trashed and dumped in ignominy still remains shunned and despised.
This would have been an entirely rational decision if they were able to keep their bubble equity, but of course they were not. The problem was not that people were being spendthrifts, the problem was that the people in charge of running the economy allowed an $8 trillion bubble to grow that had predictably disastrous consequences.
The blame here lies not with the average homeowner, who acted rationally with the information available. The blame lies with the people who managed the economy, like Alan Greenspan, Ben Bernanke, and Hank Paulson, and the people who opine on economic issues in major news outlets. If these people were competent, they would have been shooting at the bubble with everything they had before it reached such dangerous levels.
How long with the forces of Darkness hold the high ground in Washington? How long will the stench of death and decay lay across America? Well, at least until the Republicans are humbled in the polls and until Obama is told to pack up and go back to Chicago.