Survival of the Reckless: How the U.S. Mortgage Market Evolved Toward Disaster

From today’s standpoint, it is easy enough to see that the U.S. economy has not been well served by the mortgage lending institutions that became dominant over the past several decades. The financial crisis as a whole seems over-determined in retrospect, it was a “perfect storm.” The debate rages over the appropriate weightings of the candidate causes. In this paper, we focus relatively narrowly on the functioning of the mortgage market from which the financial crisis emerged, on the related transformations of the financial sector, and on the structures and incentives that developed in it. Our theoretical approach is firmly in the evolutionary tradition, emphasizing learning as the source of competence and feedback as the driver of behavior --and disputing the view that the market system can adequately compensate, through the “market test,” for the incompetence of individual actors, as well as the view that economic behavior can be entirely understood in terms of calculation of consequences in an imagined future. Survival of the Reckless: How the U.S. Mortgage Market Evolved Toward Disaster