Georgia’s banking woes are on the mind of the NYT’s Paul Krugman

Nobel Prize-winning economist and New York Times columnist Paul Krugman asks “What’s the matter with Georgia?” this morning in an op-ed focused on the state’s bank failures (we’ve had more than any other state–thirty-seven since 2008):

“To appreciate Georgia’s specialness, you need to realize that the housing bubble was a geographically uneven affair. Basically, prices rose sharply only where zoning restrictions and other factors limited the construction of new houses. In the rest of the country—what I once dubbed Flatland—permissive zoning and abundant land make it easy to increase the housing supply, a situation that prevented big price increases and therefore prevented a serious bubble . . .

But not all of Flatland has gotten off lightly. In particular, there’s a sharp contrast between the two biggest Flatland states, Texas—which avoided the worst—and Georgia, which didn’t.

This contrast can’t be explained by the geography of the two states’ major cities. Like Dallas or Houston, Atlanta is a sprawling metropolis facing few limits on expansion. And like other Flatland cities, Atlanta never saw much of a housing price surge.

Yet Texas has managed to avoid severe stress to either its housing market or its banking system, while Georgia is suffering severe post-bubble trauma. The share of mortgages with delinquent payments is higher in Georgia than in California; the percentage of Georgia homeowners with negative equity is well above the national average. And Georgia leads the nation in bank failures.

So what’s the matter with Georgia? As I said, banks went wild, in a scene strongly reminiscent of the savings-and-loan excesses of the 1980s. High-flying bank executives aggressively expanded lending—and paid themselves lavishly—while relying heavily on “hot money” raised from outside investors rather than on their own depositors.”

The difference between us and Texas? Texas had consumer protections in place, says Krugman. Georgia did not. The proliferation of small banks also helped do us in:

“So what’s the moral of this story? As I see it, it’s a caution against silver-bullet views of reform, the idea that cracking down on just one thing—in particular, breaking up big banks—will solve our problems. The case of Georgia shows that bad behavior by many small banks can do as much damage as misbehavior by a few financial giants.”

Basically, Krugman’s letting the rest of the country in on what we here in Atlanta have known–and have been living with–for a while. What do you think of his points?

A hat-tip to Decatur Metro for bringing the op-ed to my attention!