What key are you going to encrypt these passwords with? If you were to encrypt passwords in the cloud with a key that's stored on the device, you can't unlock the passwords on a different device (or the same device after flashing), which is the whole point of backing it up in the cloud. If you were to encrypt them with the user's Google Accounts password, the device would need to ask for that password on every startu…
Horseshit. Setting up a password for an Android device only needs to be done once for each device->network pairing. The reuse of Wifi passwords across devices is an edge case given the predominate ownership pattern of Android devices - i.e. most people have a phone that runs Android and no other Android device. Google's scheme allows them to harvest the passwords to a vast number of wireless networks. Google has harv…
Not every feature in Android is designed to be monetised. Google develop Android with the intent that users will use their app store/click on Google provided ads. They can only do that if they are seen to be offering a competitive, feature full product. The cloud-based syncing of your phone configuration is one of those features.
Having worked in various large organisations (including ones which are definitely part of the military-industrial complex) I can say wholeheartedly that there is no grand conspiracy. Most people, wherever they work, want to produce the best product they can.