It's a good choice from whichever angle I see it.
Lets look at it this way, if he continues this shit form that he has been showing so far, it's a straight decision to cancel his loan.
If he actually performs exceptionally well and even does better than Gerrard now, I still think it's a good decision to cancel his loan. In the short term this might sound stupid, but if we end up relying on a loaned player to improve, I can only see Real Madrid laughing their faces off because they have rediscovered a gem for free and the team that will be grimacing is us, because in the summer we would have to find another player which would be able to replace him, and our benchmark would be set far higher, and chances are that we are screwed because any player of that quality wouldn't want to come to Liverpool now within 2 years.
So. It's a good decision to me.