Let’s consider how – fundamentally – financial markets work. A young person wants to buy a house. A retiree lends that person $250,000 in exchange for a promise to pay a certain rate of interest and return some of the principal monthly for a set number of years. This is a mortgage. There are two sides to the transaction: the debtor and the saver, who is too often forgotten in the rush to bail out debtors. In simple terms, if the debtor doesn’t repay some or all of the money owed, the saver loses, dollar for dollar.
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.
