Tyler Cowen writes,

Dodd-Frank left questions of capital and leverage largely to the Basel III international banking agreements, the second piece of the new financial regulatory architecture. Basel III, like its predecessors Basel I and Basel II, encourages banks to hold sovereign debt. This has been revealed as a mistake, just as it was wrong for the earlier Basel regulations to encourage banks to hold mortgage securities.

He strongly praises Ben Bernanke, for having the Fed greatly expand its balance sheet. Because it has long-term, risky assets (mortgage securities) and short-term riskless liabilities (bank reserves), the rest of the financial sector can do the opposite.

Implicit in Cowen’s point of view is the assumption that what we need to avoid right now is a shrinking banking sector. I find that notion hard to swallow. My view on fiscal policy is similar. There are those who argue that now is not the time to cut government deficits, because that would be contractionary. My reaction on cutting back both bloated banking and bloated deficits: if not now, when?