Can Wall Street and Washington combine forces to avert the inevitable liquidity crisis?

Hank Paulson, the U.S. Treasury Secretary, is working with Citigroup, J.P. Morgan Chase & Co., Bank of America -- and any other big player Paulson can cajole -- to set up a $100B fund in hope of preventing about $380B of holdings from being dumped on the market. This fund, known as the Master-Liquidity Enhancement Conduit (M-LEC), is designed to buy assets from structured investments vehicles that cannot sell commercial paper to anyone with a rational fear of sub-prime exposure.

Simple question.

Why is the U.S. Treasury involved?

The financial news media abounds with the "market failure" meme. After all, who other than the government could get these big competitors to play together? A senior fellow at the Heritage Foundation -- a conservative think tank, mind you -- has even said, "Nothing in free-market theology says markets always work properly. If there's something that can be done of a temporary nature to help markets, then that seems perfectly appropriate."

Huh? Isn't Paulson insisting this is a private-sector initiative? Hasn't he assured us no government funds are on the table? The market is doing what it is supposed to do: discipline bad investments. This effort between the US Treasury and three big Wall Street players with a lot of exposure to sub-prime mortgages hardly qualifies as a necessary intervention into a failed market.

The Treasury's involvement in this deal is bad news. It means both Wall Street and Washington are worried. Politicians don't advance their careers by embracing sound economic principles. Bankers don't like to be object lessons. Both Wall Street and Washington have much to lose if the liquidity market dries up. It's not just the housing market that's going to tank.

M-LEC is an attempt to delay the inevitable. It's either a bet that more time might buy a soft landing for some or it's a preemptive move to distribute the blame when the economy crash lands.

Neither Wall Street nor Washington is willing to confront the real commitment of risk. Risk marries the hope of profit with the threat of loss. Profit increases our wealth. Loss increases our wisdom. A bailout is a lost opportunity to learn. It encourages market players to go on repeating their errors and making the situation worse than it was before.

Unfortunately for us, the preceding generations decided they didn't want to learn the lessons of taking risks. Government economists convinced us that they could prevent severe contractions like that one from the 1930s. The actual result has been even greater potential consequences and we're running out of options to pass them on to the next generation.

Get ready to learn something.