The Independent, a popular London-based newspaper, is reporting on a story out of the U.S. Treasury not being carried by very many American news outlets. According to the Independent, Treasury Secretary Tim Geithner is locked in a head-to-head battle with the director of the Federal Housing Finance Agency (FHFA) over whether or not Fannie Mae and Freddie Mac should sign off on a principal reduction plan included as part of the foreclosure settlement announced last month.

It would appear as though the banks and state attorneys general involved in the settlement agreed to the plan which would see the federal government pay the banks of $.63 for every dollar in principle they forgave distressed homeowners. Geithner’s position is that principal reduction will not only help homeowners, but also help the banks and get the housing market moving again. FHFA director Edward DeMarco disagrees. He believes it would be another bank bailout the taxpayers can’t afford.

Furthermore, the Independent claims that “Mr. DeMarco fears that news of principal forgiveness for delinquent borrowers would encourage otherwise financially healthy borrowers to default. Principal forgiveness would be a backdoor bailout of the banks, he has argued, because it makes homeowners better able to pay off second mortgages they took out on their property.”

Who will win the eventual battle remains to be seen. However, seeing as how the U.S. taxpayers have already foot the bill for more than $150 billion worth of housing losses, it’s hard to believe they’d go along with the new bailout with smiles on their faces.

Lessons Have Not Been Learned

While Mr. DeMarco’s assertion that the Treasury plan is another bank bailout is patently false, his secondary argument about homeowners looking for quick way out is right on the money. If Congress intervenes and forces Fannie and Freddie to participate in this principal right off it will result in more people who cannot afford their homes to stay in them well into the future. All this does is prolong the crisis and make it harder for the country to pull itself out. As painful as it is, cold turkey is the best way to relieve ourselves of our addiction to “free” government money.

What’s most astounding about this latest development is the fact that Washington seems to have not learned its lesson. Every time they get involved in trying to prop up failing business they only make things worse. Fannie Mae and Freddie Mac were central to the housing crash in 2008 because Washington was using them to buy up risky mortgages so banks wouldn’t have to take a chance on them. This encouraged the banks to make more risky loans because Fannie and Freddie became their insurance policies.

The principal reduction plan is nothing more than the previous Fannie and Freddie action repackaged and polished up. Never mind that the US government is already trillions of dollars in debt and can’t afford another housing program, if they go through with this they are once again interfering with a market that is trying desperately to correct itself. If everyone in Washington and the various state capitals would simply step back and let “nature take its course” we would be out of this mess in just a couple of years.

We’ll see what happens.