The key question is where does the government get the money to give away to people or businesses? It gets it through one of three methods, taxes, borrowing, or inflation. None of these options, though, involve the government actually producing anything of value or creating more wealth that can be spread around the economy.
The first option government has is to tax people, which takes money from homeowners struggling to make their mortgage payments. Second, it can borrow money from investors or foreign economies, increasing the amount of tax money that is spent on interest payments and pushing the problem of paying back the debt onto future generations. The third option is for government to print the money out of thin air, which causes inflation by diluting the money supply and will lead to increased prices for goods and services.
Government does not produce anything tangible, so it can not create wealth out of nothing for people who need more money to meet their own obligations. Government can only provide money to one group by stealing from another group, borrowing money and stealing from future generations, or stealing from all of the people by inflating the supply of money. Any of these actions may hurt more people than help homeowners facing foreclosure.
But the government also should not supply money to the banks that are in trouble from the foreclosures, either. That is what the government has been doing for over half a year now, while it has been "debating" what to do with homeowners in foreclosure. From tens of billions of dollars in direct "liquidity injections" to hundreds of billions of dollars available to trade in bad mortgage debt for US Treasury securities, the banks have been given generous donations care of the American people to get them through the credit crisis.
But all the government and its rulers at the Federal Reserve have done is give the banks inflated money and talk about giving inflated money to homeowners. Neither is a long-term solution and may lead to dangers like bank failures, a collapse in confidence in the dollar, or increasing inflation. Providing corporate welfare is all the government has done so far to address the foreclosure crisis, and it has not helped any homeowners keep on top of their mortgages.
The banks may be able to get rid of this bad debt by giving it to the Fed, but that just hides it away. The bad debt becomes the backing for the American currency through a not-so-clever trick. The people in foreclosure are still suffering -- but now the government has hidden away their loans so that the banks don't have to report the bad debt and they do not look like they are in such trouble anymore. Of course, the banks are still in trouble, and homeowners are still suffering, but there is a perception that it is not quite as bad anymore as it was a few months ago.
Possibly the worst aspect of subsidies to the banking industry will be that this gives the banks the incentive to do absolutely nothing to help homeowners stop foreclosure, since they can count on future bailouts when property values decline further and more mortgages go into default. But the lenders end up with free money from the Fed, they keep up the appearance of solvency, and they steal properties away from people.