Daniel,
I’d like to take your 3 points against the liquidity injection in turn.
1) I believe this is your weakest point, because you make several statements which blindly ignore what forces have put us in this situation. Assertions such as “One of the great advantages of free markets is that resources are allocated based on what creates wealth” ignores the very idea of bubbles, let alone the current interconnected, overpriced, and undervalued crisis we find ourselves in today. Investors, combined with a lack of transparency regulation, put us here. There seems to be little virtue in giving them a higher standing than the government in this case.
That said, I would also be concerned about the government attempting to direct capital flows once they’ve injected liquidity into banks. Hopefully they’ll be able to take a quiet return on their money and leave once they’ve recouped their losses.
2) I like this point. Influence peddling is a tough nut to crack, but we’ve done an exceptionally poor job of “starving the beast” in the past. I agree that the power of lobbyists would expand here, but I think it should probably be dealt with at a more direct level than avoiding the liquidity injection.
3) This is your most contradictory point. Investors know that when the government buys shares of companies (such as AIG) the shareholders tend to get wiped out. You noted that the market has been unstable since the announcement of the bailout plan, but you seem unwilling to make the link between their reaction adn their likely losses, instead implicitly claiming that investors are looking at the future of government mismanagement of banks. Investors have become increasingly focused on short term returns, which was a major factor in bringing us to where we are today as well as the present financial instability. To read the situation otherwise is to misunderstand what drives market volatility.
Of course, moral hazard is a real and dangerous risk, but I do not believe banks will be securitizing and lending loosely with the confidence that the government will come rescue them with an injection. Instead they appear to be lending to hardly anyone… far the opposite of the expected moral hazard reaction. Again, the concern is real, but I believe in this case it is not a particularly great one.
In short, I think your argument would hold if your assumptions were more solid and more likely, but at present I remain unconvinced that the stock purchase plan is such a bad idea.
