The short answer to the headline's question is neither -- in theory. In practice, the U.S. government is now attempting to do both. There may be a rationale for that (to a limited extent), but there are significant problems with the way they're going about things.
The new, new plan
The Obama administration announced a plan to stem home foreclosures, with $75 billion in subsidies to help lenders reduce mortgage payments for 3 to 4 million borrowers. In addition, the plan calls for 4 to 5 million borrowers to refinance their mortgages through government mortgage giants Fannie Mae
These measures characterize a "bottom-up" approach to the current crisis, targeting falling home prices and rising foreclosures directly. The bulk of the government's efforts (under both the Bush and Obama administrations) to date has been directed toward the blighted financial sector, with a very mixed record.
Dealing with "Wall Street"
The only private organizations that should be bailed out are terminal institutions that pose a genuine systemic risk. Fannie and Freddie fit the profile, and AIG
Those organizations that are not both terminal and posing systemic risk should be allowed, nay encouraged, to fail. (Note that I do not, however, consider coercing healthy financial institutions into accepting a government investment either a bailout or a good use of taxpayer funds.)
The trouble with "Main Street"
Dealing with home foreclosures looks rather more tricky. My instincts suggest that one shouldn't interfere with home foreclosures in order for the housing market to find its proper level. The trouble is the scale of the problem – the resulting massive wave of foreclosures could cause housing prices to understate fair value when they bottom. This could hurt the values of loans and mortgage securities and leave some banks technically insolvent when they are, in fact, viable. Cue a slump in confidence regarding banks, reduced lending, and… well, you know the drill.
Do the pieces fit?
Of course, temporary aberrations in the price of those securities would be like water off a duck's balance sheet for an institution with a long-term perspective and deep pockets -- which brings us back to another one of the government's initiatives: a "bad bank" plan that would have the government take soured assets off bank balance sheets. Perhaps there is some coherence to the government's approach, after all, although as I pointed out last week, that "bad bank" has some holes in it, too.
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Alex Dumortier, CFA, has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. US Bancorp is a Motley Fool Income Investor pick. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.