What’s the matter with Georgia?

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Georgia has a case of the “banks gone wild.”

In this New York Times Op Ed, Nobel Prize economist Paul Krugman says Georgia has shown itself to be a clinic in bank-screw-up (nevermind its “our unemployment and home foreclosure rates are bigger than your unemployment and home foreclosure rates” tournament titles to date over the recession).

Krugman explains that Housing bubbles were concentrated in places where new construction was restricted.

Elsewhere, i.e., in what he dubs the “Flatland”, where new construction wasn’t restricted two extremes happened in two sufficiently similar markets: Texas vs. Georgia.

Texas’ housing market and banking system have remained largely in tact. Georgia’s, however, has gone to hell in a handbasket:

“Banks went wild, in a scene strongly reminiscent of the savings-and-loan excesses of the 1980s.

The difference says Krugman was effectively consumer protection law plus a regulatory differential in sub prime lending. Krugman’s short punchy read explains that Texans unlike Georgians couldn’t cash out home equity and grow mortgages as easily.

“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.”

Dangerously, Krugman says it’s a lesson not informing the current banking reform debate focused on preventing big bank failures:

“What’s striking about the contrast between the Texas story and Georgia’s debacle is that it doesn’t seem to have anything to do with the issues that have dominated debates about banking reform. For example, many observers have blamed complex financial derivatives for the crisis. But Georgia banks blew themselves up with old-fashioned loans gone bad.”

“And for all the concern about banks that are too big to fail, Georgia suffered, if anything, from a proliferation of small banks. Actually, the worst offenders in the lending spree tended to be relatively small start-ups that attracted customers by playing to a specific community.

Krugman says we can attend to reform of a few large banks and ignore the damage possible by groups of rogue small banks to our peril.

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