When the burst of the housing bubble launched the Great Recession of 2007, the Federal Reserve was quick to lower interest rates to resuscitate the slumping economy.

The short-term rates (Fed funds rates) were lowered in successive steps to near zero in late 2008 (WSJ 12/17/2008). Normally, the Fed stops at adjusting only the Fed funds rates that banks charge among themselves for very short-term loans. But in order to stimulate the economy and bail out the financial sector, the Fed engaged in a frontal assault on interest rates of all terms.

The Fed became a huge buyer of Treasury bills with less than 1-year maturity to fund federal deficits and bailout programs. The Fed also bought heavily among others Treasury bonds with up to 10 year maturities and mortgage-backed securities. This heavy buying has forced up their prices and reduced their yields.

These rate-suppressing activities lowered interest rates of all terms. For example, the interest rates on money market mutual funds declined to 0.06% in late 2009 from 4.6% two years ago. The yield on 5-year Treasury securities fell from 4.4% to 0.3%.

Lowering interest rates might help borrowers and lenders, but savers and retirees with fixed income were forced to foot the bill.

US banks booked $56 billion of extra interest income in the two years after the Fed started cutting rates in September 2007 (BW 2/15/2010). While short-term interest rates were kept low by the Fed, the longer-term interest rates remained relatively high. Specifically, rates on 30-year mortgages declined less than half of the 2.88-point decline in rates paid on 3-month CD (certificates of deposits). Banks could earn risk-free profits by simply buying longer-term Treasury securities with practically interest-free deposits.

On the other hand are the poor savers who had no choice but to put their savings into short-term risk-free FDIC-insured bank accounts hoping for higher rates in the future.

Savers not only paid through lower interest income. They must also pay as taxpayers to fund the bailout of banks and other financial institutions.

Savers could offset some of their losses only if they had not lost their jobs and were in a position to borrow. For example, if they had not bought a house before the meltdown, they could now buy a house at a reasonable price at an affordable mortgage rate.

But if they bought a house just before the housing bubble popped, they would suffer both a loss of home equity and be stuck with an expensive mortgage.

How many lucky savers were left standing during the Great Recession?