Why Capital Regulations did Not Cause the Mortgage Crisis

I still read many different takes on what caused the subprime housing bubble. The least compelling to me is the capital regulations. Mortgages were historically the lowest loss rates of any asset class, for the entire dataset anyone looked at. Think of a capital regulation as a rule enforced by government. If the rule is binding, this merely makes the activity more expensive, as when you amortize the cost of getting caught smoking pot (including potential career repercussions, which vary considerably by profession). Many rules we think are unnecessary are worked around, as for instance, ProShares has many stocks that allow you 3-to-1 leverage, which is technically illegal if done directly (it violates Reg-T for retail brokerage accounts). There are shares that allow you to be short, which for 401ks is otherwise illegal, but now legal.

Now, generally, the government allows you to do many things you can do, but shouldn't. Moderation in all things is a good rule, and what prevents most people from excess is discipline. People generally don't do things to excess because it causes various hangovers, real and metaphorical. So, if the government assigned a low capital ratio to mortgages, this did not cause banks to invest in mortgages in excess unless they also believed these were of low risk. It was a common mistake. So common, in fact, I think it strains credulity to think the regulation was extremely important. There were enough investors and companies not bound by US banking regulations involved to note this was bigger than them.

The fact that I can drink a bottle of Scotch every night is no reason to blame the government if I choose to do so.