Issue 1: The Libertarian Mechanisms of the Socialist State

I've been reading the Geithner plan and as I understand it (though feel free to dispute this as well), the plan is on one hand a Keynesian influx of money designed to increase the price of toxic assets so banks don't fall below capital reserve requirements, and on the other hand, using the last 15% of the investment that remains in the hands of private investors, and moves the decisions regarding distribution of those assets (within parameters set by the Treasury) to a market mechanism that then prices those assets in the aftermath of the influx of capital.

It seems like they're splitting the difference on the welfare state here. They seem to have introduced a mechanism I find very interesting but foreign, whereby the state contributes largess into specified areas while allowing capital markets to continue to give relative valuations within that segment, allowing the differentiation of a bad crop into better and better segments until finally somebody can finally say, out loud and unironically, "I have the best toxic asset!"

Now, I'm pretty curious about this idea because my economic study has been on the extremes of the spectrum, Marxists and libertarians mostly, influenced by mainstream economic reporting. Therefore, I think I understand the arguments and critiques of the libertarians and the Marxists, but what they share is their relative failures to connect with real market conditions (Marx's success with a new valuing mechanism marred by his failure to create the necessary pricing mechanism, Hayek and Friedman's difficulty reconciling principles of "freedom" with the a) lack of will in a democratic society to endure true capitalist recessions, b) failure of that democratic society be more interested in freedoms than securities). Maybe this is common knowledge that I didn't know, but does this actually remake the Keynesian injection of capital into a non-bureaucratic mechanism, where negative pressures are alleviated but markets aren't overincentivized and become drags on production? Where, instead of a minimum wage, for example, I could provide a government fund that would pay up to a certain percentage of a wage increase on a certain population of low wage earners. The money would come from a tax increase on employers equal to the difference between any workers wage and a point that would have previously been defined as the minimum wage, thereby removing incentives to drive wages down. Employers who don't pay minimum wage or below would remain untaxed, costs to the effected employers would be equivalent, but employers could pay the better caliber of minimum wage workers at a rate above the minimum wage by paying those lower caliber workers less, spreading the flattened increase into a distribution curve. Now, excluding other pressures both on and from the minimum wage (for the moment), isn't this a fundamentally different mechanism from either a) government fiat or b) unsafe capitalism? Is it better? More ethical? Less?

Regarding the treasury plan, I'm deliberately ignoring the implications on the revenue end that could end up as disincentives; we're stuck between a terrific debt burden and China explicitly warning us not to inflate it away, so I don't take it lightly, but I'm more concerned about the way this specific mechanism could work.

A final caveat here. I used the term artifical earlier, which implies that capital markets are "natural" and government-influenced markets are not. I dispute this, totally, but I leave it here for clarity.