The people in the high-up knew. A lot of people in all levels knew. People knew it was a bubble and it cannot last. What people didn't know was how to pop the bubble gently to have a soft landing. Remember real estate and mortgage were majority drivers of the economy from 2000 on after the Dotcom and stock crash. Popping the bubble meant wrecking the economy. People were really uneasy in deliberately engineering a recession. The longer the wait the worst the crash.
Nit pick - a bubble bursting doesn't wreck the economy any more than dismantling an engine for a tune up wrecks that engine. A recession is really a readjustment of the economy, bringing it in line with reality.
