This is probably a dumb question, and I’m sure Paul Krugman could answer it in seconds, but he probably would just blow it off as not worth answering.
The financial crisis was caused by a collapse the home mortgage market, right? By the discovery that lenders were making home loans to people who could not pay them? Everything went bad when people started defaulting on mortgages and all of the paper that was based on those mortgages was discovered to be worthless.
Home foreclosures hit a new record high in the third quarter of 2009, and the stock market increased 50% to hit 10,000.
So how does an economy that seriously collapsed as a result of bad home mortgages make such an astonishing recovery while home mortgage foreclosures continue to get worse?
Questioned answered: Friday, 11:00am
Actually, foreclosures did not hit a record; they actually declined this year. "Notices of default" were at an all time high and, it turns out, banks are not even issuing those until payments are five months in arrears. They are then holding on to the properties and not foreclosing, creating what is called a "shadow inventory" of bank-owned properties.
Why? Well, if they foreclose they can no longer show the mortgage as an asset. So the answer to my question is that the improvement is because banks are now simply ignoring homeowners' non-payment of mortgages.