In a move backwards from liberty and free markets, the government is going forward with its plan to inject $250 billion in capital into the nation’s banking system by buying equity shares in all the major banks. While the money will go to “healthy” institutions to avoid moral hazard, it still is an incredible breach of capitalist principles, and has the potential to go very wrong. The biggest problem is that we may not be able to see where this buy-up causes trouble. The tentacles of the Treasury and Fed are so wrapped up in the system now that its going to be near impossible to guard against massive conflict of interest corruption. We’ve seen what happens when the government has operational control of an entity that is not a core function of government: USPS operates at a $2 million annual loss, Amtrak runs on a reputation slightly below the Guatemalan and Slovakian transit systems, and big bureaucracies like the DMV and Welfare become the bane of our collective existence. President Bush said yesterday the government’s actions were “not intended to take over the free market but to preserve it,” and that the “government’s role will be limited and temporary.” Of course he also said the war in Iraq was not to take over their nation and oil fields but to preserve their freedom and our security, not to mention the pitch that the war would be limited and temporary–and we’ve seen how that turned out. Nine banks will initially have part of their firm purchased by the federal government: Citigroup, JPMorgan Chase, Bank of America, Wells Fargo (as the four largest banks), plus Goldman Sachs, Morgan Stanley, State Street Corp, Bank of NY Mellon, and recent BOA acquisition Merrill Lynch. The $250 is slotted to come from Congress’s $700 billion EESA package, and $125 billion is scheduled for immediate distribution to these nine solvent firms. Secretary Paulson defended his move saying “These are healthy institutions, and they have taken this step for the good of the U.S. economy.” Stocks rose yesterday as expectations soared on news that this new capital would potentially free up the credit markets. The Treasury Department can spend $250 billion of its money without few strings attached, and the President can authorize another $100 billion. After that the Treasury must request Congress release the next half. Paulson and his new cronie Neel Kashkari still plan on using the remaining $100 to $225 billion of the first half of their money to buy mortgage backed securities off balance sheets and insure the remaining MBSes in the market, but partial nationalization has been determined to be the most efficient choice of the moment.