Ever since the creation of the Federal Reserve, a private central banking system, our economy has been entirely based on a house of cards.
Our government, regardless of the party in power, has refused to acknowledge that our IOU based economy can't go on forever. Artificial manipulation of interest rates, inflation of the money supply, massive deficit spending (by both parties but Bush has been particularly bad) and manipulation of people and businesses via tax policy (taxing savings, investment and production instead of consumption) have created the mess we're in, but this is really just a continuation of the stock market bubble. The bubble was just moved from the stock market to real estate.
Then the government makes things worse by mandating that banks not use as much discretion against people who are less likely to pay (Community Reinvestment Act 1977, 1995) and via Government Sponsored Entities (Fannie Mae and Freddie Mac) who, because of their state sponsored status, were able to grow well beyond what a true free market competitive system would have allowed (the risk they held would have been spread amongst hundreds or more companies with varying levels of risk tolerance).
"Federal Housing Enterprises Financial Safety and Soundness Act of 1992 required Fannie Mae and Freddie Mac, the two government sponsored enterprises that purchase and securitize mortgages, to devote a percentage of their lending to support affordable housing."
We've proven over the past 100 years that Keynesian Economics doesn't work (Krugman is basically a Keynesian) and that the Austrians were probably correct. If anyone is really interested in this but doesn't want to get bored to tears by it, pick up a copy of Economics in One Lesson and Road to Serfdom. Especially important since schools have mostly taught Keynesianism and the "echo chamber" effect is so great.
Think about this. The total value of bail out money and loan guarantees is now over $46,000 per U.S. Household. $46,000?!! China now holds 10% of our country's debt obligations (they just surpassed Japan). This is nuts but shows how much of our supposed prosperity of the past 30 years was borrowed.
And the real debt number right is over $53 trillion. Google "IOUSA" or look for the 30-minute bit on YouTube to learn just how screwed we all are.
Regards to all.