Not even low interest rates are enticing consumers to borrow

Consumers are saving a lot more money than they did before the Great Recession, and it is changing the world of finance in significant ways.

Finance officials hoping to stimulate developed economies with spending are frustrated, as nothing they do tempts consumers out of a savings-first mindset, Reuters reported.

"I do think we should entertain (the idea) that this is a substantial change in household behavior and that means a much less leveraged consumer than in the past," Adam Posen, president of the Peterson Institute for International Economics, told Reuters.

On the one hand, the increased awareness of markets and savings on the part of homeowners is encouraging, because the reckless borrowing that inflated housing prices in the mid-2000s helped cause the economic downturn. But on the other hand, the consumer mood has now shifted so far back that financial institutions worry their faith in the promise of economic growth has been permanently stunted, Mark Trumbull wrote for The Christian Science Monitor.

"Many were traumatized by the financial crisis of 2008 and are waiting for the other shoe to drop. They fear that something is bound to blow up in the credit markets, the way Lehman [Brothers] did, leading to a global financial contagion," economist Ed Yardeni, who runs a New York area investment strategy firm, wrote in a note e-mailed to clients. "The risk is that we talk ourselves into a recession."

The Great Recession seems to have permanently altered consumer spending habits, and now homeowners are intent on paying off their mortgages instead of borrowing against them. Interest rates for a typical 30-year home mortgage have slipped to a three-year low because of economic worry, mortgage finance agency Freddie Mac announced Thursday. The rate currently sits at 3.58 percent, and dropping. This is not the expected path of mortgage rates in a growing economy and suggests that consumers are acting independent of the actual economic benchmarks, Reuters reported.

Financial institutions the world over are throwing everything they have at their sluggish economies, even experimenting with previously unheard-of negative interest rates. The International Monetary Fund is pushing its standard strategy: urge governments to spend more when consumers won't. The Federal Reserve has raised interest rates just once since the Recession's end, but the response was so cautious that future raises are on hold.

Consumers remain intent on trying to live within their means and pay off debts, and financial officials are increasingly recognizing that they need new policies to manage economies in which homeowners behave differently.

"You can't create demand from thin air," a top policymaker from Japan, who is involved in this week's Group of 20 negotiations in Washington, told Reuters. "What’s needed is to create an environment in which companies and households feel confident to spend."

This report includes materials from Reuters.