When politicians fail to understand (or choose to ignore) all the consequences of policy actions, bad things happen.

A great example of this is the ethanol boondoggle. We've exacerbated upward pressure on worldwide food prices by converting 1\u20445 of our corn crop to fuel production. As U.S. farmers plant more corn, they cut acreage of other crops, particularly soybeans. That, in turn, contributes to a global shortage of cooking oil and other basic foodstuffs. We end up with a whole new set of problems, some of which are arguably worse than those connected with exploring for oil and gas.

We're faced with the same sort of political myopia in the housing realm. The urge to keep people in homes they can't afford (and could never have afforded if not for virtually free credit in the first half of the decade) is driving our leaders to repeat the mistakes of the ethanol crowd. U.S. Rep. Barney Frank, D-Mass., has unveiled a $300 billion plan to stem foreclosures by writing down mortgage values to current market, and refinancing people into smaller, federally subsidized loans with terms "the borrower can reasonably be expected to pay." The maximum allowed loan-to-value ratio of the new mortgages is 90 percent.

The proposal basically resets people's equity levels from underwater to a positive 10 percent, with a provision for partial federal recapture of whatever appreciation may occur up to 5 years down the road. The problem is that the program creates powerful inducements for creditworthy borrowers to go delinquent on a massive scale.

As Tom Brown of Bankstocks.com put it: "Take two neighbors who both took out 0 percent-down, $300,000 adjustable rate mortgages, each with a 5 percent introductory rate, in mid-2006. Their houses have since fallen in value by 10 percent, to $270,000. At reset (which will happen any month now, to around 8 percent) their monthly payment will rise to $2,000 from the current $1,250.

"Borrower A is current on his loan, while Borrower B is delinquent, and so qualifies for relief. His new, FHA-funded loan comes to just $243,000 -- 90 percent of his home's $270,000 appraised value -- so his monthly payment (at the same 8 percent he would've been paying under the terms of the old loan) is now just $1,620. Borrower A is paying $2,000 per month, after reset, for the identical house. Borrower B now has $27,000 of equity in his home, while A is still upside down by $30,000. What do you suppose the Borrower As of the world would do at this point? A lot of them will go delinquent on their mortgages on purpose, to qualify for the same deal that the Borrower Bs have gotten."

Economists have fancy phrases such as "moral hazard" and "adverse selection" for this sort of behavior, but the simple fact is that human beings, in order to maximize their own financial benefit, will fold, spindle and mutilate whatever rules bureaucrats put in place. Mr. Frank need look no further than the current crazy quilt of federal farm subsidies to recognize this fundamental truth. Instead of inducing millions of (otherwise honest) people to delinquency, dragging the problem out over 10 years and sticking the taxpayer with a gigantic bill in the end, we should face the fact that lenders basically gave away the store from 2003 to 2006.

Left alone, home prices will find equilibrium, likely at levels close to those that prevailed after the last recession. If this results in the failure of a few investment banks and a few dozen commercial banks, so be it. The Federal Deposit Insurance Corporation was created for just such an eventuality.

For those of you worried that we'll displace a whole generation of "homeowners" in the process, I pose the following questions: Do the people who live in a home they cannot afford for three or four years have the right to be called "owners?" And once removed from houses in which they had almost zero equity, are these same people really worse off than before they moved in? Granted, their credit rating may be shot, but given the willingness of banks to lend money to anyone able to fog a mirror during the boom period, it may not have been all that great to begin with.