I agree that teacher-student interaction and personal relationships should be more encouraged in higher education through smaller class sizes. Nevertheless, I don't think that this is currently limited to liberal arts colleges—I attend a university with a small yet excellent engineering department, in which relationships with professors have proved invaluable to my education.
Large lectures on the other hand are minimally interactive, and could be migrated to online video. The benefit of this migration is that professors who held large lectures in the past would be available to teach smaller classes, providing more opportunities for one-on-one interaction. The hard decision is which classes to offer as online lectures and which to offer with small class sizes, as different courses seem to lend themselves to different teaching styles.