Today’s Wall Street Journal reported on a relatively new trend in the United States. 
A growing percentage of homeowners whose mortgages are underwater are walking away from their houses and renting even nicer properties at lower total monthly costs. Given California’s trendsetter history, it is likely that this phenomenon will make its way across the United States.
The Bad
Bad things occur when homeowners walk away from underwater mortgages. Lenders take losses and property values go down depressing the housing market. In addition, mortgage holders are given bad credit ratings.
The Good
There are also positive effects for the economy when borrowers get out from loans they cannot afford. For example, when a borrower cuts the monthly mortgage payment by renting, let’s say from $4,000 to $2,000, that household then has $2,000 more per month to spend on other goods and services allowing the economy grow.
The Ugly
The government helped create the housing bubble, an economic imbalance, by making interest rates artificially low earlier in the decade. 
This was done to avoid a previously needed correction to our economy. Unfortunately, that action led to the housing bubble that then popped. In other words the government’s intervention or tinkering with the market led to an even worse problem then the issue they “cured”.
Left alone the free market will correct the current imbalance, even though it is severe. Housing prices will go down to where they belong based on supply and demand. Borrowers that took mortgages that they could not afford will get out of them and some will loose their properties. Lenders who made imprudent loans to people that they should have known could not pay for them will take losses. While painful, these corrections are necessary to bring the various parts of our economy back into balance.
Instead of allowing the rebalancing, the government is once again doing just the opposite. Its attempts to stop the corrective actions from occurring will create even larger imbalances in the economy and greater problems. 
The current efforts include making interest rates even lower, repeating the same mistake once again. They are also offering tax incentives to purchase homes to increase demand. Finally, they have created policies to try to keep people from defaulting on mortgages. Washington keeps trying the same failed formulas expecting different results. Knuckleheads!
The government’s efforts are succeeding in the short run, luring consumers and the economy into a larger trap. Instead of allowing consumers to rebalance their mortgage payments in line with their incomes, the government incentives have some taking on more debt. This will result in: 1) less money for consumers to spend on other goods and services prolonging the recession , 2) consumers once again taking on more debt than they can afford, and 3) consumers buying houses whose values will drop creating more underwater mortgages.
The government is once again doing battle with the laws of supply and demand. They can’t win this war. The longer the government delays the needed economic corrections, the more painful the rebalancing will be when it inevitably occurs.
The story behind this mess would be humorous if not so tragic. Chapter 1; The government helps create the housing bubble that lead to the meltdown. Chapter 2; When the housing loans and their derivatives go bad, the government bails out the banks so that they can make more imprudent loans. Chapter 3; The government offers incentives for people to buy homes that they would otherwise not buy in a market where housing prices are dropping. Anyone that can make sense of all this will need to write the final Chapter.
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