Thus, the claim that cutting mortgage rates on existing loans will generate billions of new spending totally ignores the fact that people living off the interest on their savings lose exactly the same amount of spending power. You won't see that mentioned in the policy discussions about what to do about the housing market mess.
Savers rarely make these loans directly to borrowers. It is costly to locate borrowers, to determine their creditworthiness, to monitor the payments and to offset the riskiness of making one single loan that amounts to an "all or nothing" deal. Mitigating these costs is the role of financial institutions, such as banks.
Savers who deposit their money in the bank "invest" in a pool of loans made and monitored by professionals, spreading the cost of losses over many savers - losses will always occur - and keeping operating costs low. This provides a net return to all savers. So, putting your money in a savings account is investing in the pool of loans made by the bank or other financial institution.
We are not happy with the "experts" who were part of the mortgage fiasco. Losses were so large that savers had to be rescued by the Federal Deposit Insurance Corp. (FDIC), and many financial institutions went bust. Congress, of course, believes it has to do something. It wants to lower rates on mortgages, which are legal agreements to pay savers who put up the money. It wants to "write down" mortgages for people who overpaid for the houses, once again destroying the savings of retirees and others.
The Federal Reserve has used its powerful tools to reduce interest rates to the lowest levels ever. The return on savings is so low, there is little reason to save and put money in a bank. Inflation rates are higher than interest rates, so the return on savings is actually negative.
