Bail Out Cause Of Liquidity Panic?

Over at TPM Cafe, Elizabeth Warren tells how she spent yesterday:

At a Harvard panel discussion yesterday, economics professor Ken Rogoff made an interesting point: The liquidity crisis isn't real. Or, to restate it: Any liquidity crisis is caused by the promise of a government bailout. Ken said that his many friends in investment banking said that there is plenty of money to invest in financial services, but right now it is "sitting on the sidelines." Why? Because the financial services industry does not want to pay the terms demanded. As he put it, why do business with Warren Buffett who will negotiate a tough deal, if you believe that the government will ride in soon with cheaper cash?

Ken also talked about the need to shrink the financial services sector. He thinks it is good that the investment banking houses are failing and many people on Wall Street are losing their jobs because, in his view, we have an oversupply in that sector and our economy just can't support it.

Mind-blowing but it this makes sense to me. Rogoff is a very smart man -- possibly the keenest economic mind of our generation. Sadly, no one in Congress is listening and/or can hear this voice of reason over the lobbyists' din.

As I said the other day, I vote we don't give any cash to Wall Street until they stop acting like crack addicts. Congress' compulsion to give these financial wizards $700 billion+ worth of "crack" can only make the problem worse.

-AF