Also, that means that for the majority of users, it's an extra install step that they cannot complete. "Why does this database creation step fail? It's the first step, but now it's telling me to do some other thing? The first step of the installer doesn't work! Drupal sucks!"
That's my main concern with adding a db-creation attempt. :-)
well, your initial concern was with password submission. but anyway ... indeed, none of us wants to annoy a majority of users. so about "30 seconds" of further thought suggests that the wizard can stay the way it is for now, but we add a link under the database name field that says "don't have a database yet? click here and we'll try to create one for you." if we are to take drupal to the next level of popularity, we are going to have to put a priority on this sort of easy experience.