The economic situation in America is a complex thing. Trying to express it in simple terms is tricky, and almost always creates more confusion than understanding. That's because most people who seek to express the situation in simple terms do so by oversimplifying the complexities. What they should be doing is teasing out the few aspects of the situation which are simple in nature from the web of complexities in which they're trapped. I'm going to try a little of that right now.
First of all, in regard to the question of where the money all went... it's mostly gone. It can't be gotten back. Money has no value of its own, it's a representation of the value of other things.
A bunch of rich, smart people found a way to create financial instruments which appeared to have value but in reality did not. They bought and sold them as if they had great value, and they made obscene profits by doing so. They took those profits out of the total pool of money and pocketed them. By the time it was discovered that those financial instruments had little or no real value, it was too late. Enormous amounts of money had been drained out of the pool under false pretenses. A lot of the money that was drained out was sheltered from taxation and siphoned into private offshore accounts. For all practical purposes, it's gone.
When those phony financial instruments collapsed, their value went from huge to zero. Our economy decreased in size by the amount of all that lost value. If it ended there, things would not be nearly as bad as they are.
But the economy also decreased by the amount of profits which were made by buying and selling those phony financial instruments. Those profits are now private property. The whole scam was too big, and went on for too long, to ever track down who pocketed how much of the proceeds. You might wonder how the money can really be gone, since people who are taking in huge profits also spend huge amounts of money, effectively returning that money to the general economy. Normally, you'd be right. But in this case, the rich got richer on a scale and with a speed never before seen in American history. They couldn't possibly spend more than a small fraction of the money they were draining out of the system. So instead of spending it, they stashed it. No one can force them to spend it, and they're not likely to spend it willingly. That money has to get them through the years of hard times we're all facing, until the economy recovers from the damage they caused.
It seems crazy to think that anyone could haul in profits bigger than any ever seen in the history of this country, and somehow avoid paying their share of taxes on them. It's not really that hard, if you have a general understanding of how much of the way our financial system operates is fantasy-based. Money can be shuffled around, so that by the time it's taken out in the form of profit it's nearly all taken as capital gains. The maximum tax rate for capital gains is much lower than the tax rate the average American worker pays on wages earned. Speculators can sell financial instruments they haven't even bought yet and take the profits, then decide not to buy what they just sold. The broker who mediated the deal can be left on the hook for the failure to deliver, rather than person who profited.
There are lots of other examples of ways to take money out of the system without putting anything of value into it. The only requirement is that you have to not care about ethics or what the consequences for others will be. It also helps if you have a federal administration bent on dismantling the oversight and enforcement bodies which are supposed to catch things like this and nip them in the bud.
To make things worse, a lot of the money the federal government did manage to take in from taxing those enormous profits was funneled back into the pockets of the super-rich by privatization of governmental services. And to make things even worse yet, we started a phony war so we could hire private contractors to fight that war and pay them with the taxpayers' money. I'm at a loss to come up with a more efficient way to take money from the general population and divide it up among the rich, while looking as if you're doing the whole world a great big favor. How else can you rob people and convince them to give you a standing ovation while you're doing it?
At the risk of sounding like a broken record... if it ended there, things wouldn't be as bad as they are. The trouble is, everybody wanted to get in on the action. Everybody wanted to ride the wave. Real estate became the average American's phony financial instrument. People found out you could buy a house, put a few thousand dollars into improvements, then sell it a year later for a huge profit. Real estate values rose at a fantastic rate. That created new equity for homeowners who weren't buying or selling. That equity could be cashed out by refinancing or taking out an additional mortgage. All that profiting from rising real estate values drained more money out of the system in the form of (say it with me) profits from financial instruments whose value was mostly pretend.
Local and state governmental entities stood by and cheered as it was happening. Average Americans couldn't shelter their proceeds the way the super-rich do, so all that buying and selling, refinancing and second-mortgaging, was producing revenues for those governmental bodies. The crazy increases in property values produced correspondingly crazy increases in property taxes. As the money rolled in, our elected officials were too enchanted by the piles of cash to stop and ask whether or not it was even a good idea.
What I'm getting at is that too many people, at too many levels, were participating in the rush to drain money out of the pool in the form of profits on things which had value only on paper and only on a temporary basis. It broadened and accelerated, until it passed a tipping point and the whole thing came crashing down. When it did, it took the whole economy with it.
Here's another simple thing which is being intentionally obscured by those with a vested interest in preserving the status quo. When the federal government provides emergency funds to those industries which are teetering on the verge of collapse, that is not socialization of those industries. It is not socialism of any kind. Those who created this mess already altered the system so that the profits were overly privatized and the risks were overly socialized. They did all that socialization of risk before things fell apart. They did it because it made their rape of the system possible. We are stuck with the bill because of what has already been done. Refusal to pay the bill will help no one. It would only serve to further disable the already damaged system we're now trying to resuscitate. Whether or not that's fair is entirely a separate issue and is not directly related to the issue of dealing with the aftermath of all this financial ruin.
Now that all the phony value which made it possible for the rich to get incredi-rich, and for the average worker to live beyond their means for years has collapsed and disappeared, we have to replace it with real value. We have to create value the old-fashioned way, with hard work. We have to make things which are more valuable than the sum of their parts, and sell them. We have to provide services which offer real value to those who buy our services. We won't get back to where we were before this collapse until we've replaced all the now-missing phony value with real value. If we cheat on the creation of that value, we'll only end up just as screwed as we are now, if not more.
We need to get it through our heads: the money was fake, and now it's gone. The money that's left is the real money. If we want more money, we'll have to create things of value and increase the value of the things we have, because money itself has no value. It only represents other things which do have value. Healthy Americans are valuable. High-quality education is valuable. Renewable energy sources are valuable. Roads and bridges are valuable. Water, air and land are far more valuable when they're clean and can support living things.
And lest we forget... Justice is valuable. But that's another subject altogether.