The housing bubble inflated people’s personal balance sheet from about 2001 to 2006, and they extracted that growth in equity via HELOC’s and increased their overall spending. From a micro standpoint, they increased their wealth. From society’s standpoint, the total housing stock stayed (about) the same, so in a macro sense the nation was no better off.
The last half-decade has seen everything reversed, in which personal balance sheets have been devastated by the decline in housing values, while liabilities have stayed about the same. This is why the Great Recession has proved so intractable–consumer spending is not only no longer hyped by rising housing values, but is hurt by the evaporation of housing equity.
Krugman, a fervent Keynesian, has demanded more fiscal and monetary stimulus to make up for the lack of consumption. He has claimed that the only problem with the stimulus so far is that it has been too small. Notably, he is big government guy, so instead of the stimulus coming in the form of tax cuts, he has pushed new programs, agencies, and government workers, all of which become entrenched and impossible to remove when (and if) recovery comes.
