Krugman on Georgia Bank Failures

Illustrious economist and New York Times columnist Paul Krugman has directed his learned attention toward the failure of small banks in Georgia.  Why? Embarrassingly enough, it's because Georgia leads the nation in bank failures, and the majority of those banks are small.

Georgia is part of what Krugman charmingly labels "Flatland" - where "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."  In most of Flatland, by Krugman's reckoning, no housing bubble means fewer bad mortgages means fewer bank failures.  No so in Georgia.

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. Thus Georgian Bank, founded in 2001, catered to the state’s elite, some of whom were entertained on the C.E.O.’s yacht and private jet. Meanwhile, Integrity Bank, founded in 2000, played up its “faith based” business model — it was featured in a 2005 Time magazine article titled “Praying for Profits.” Both banks have now gone bust.

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.

Krugman's formula for reform in Georgia is better protections against predatory lending.  Former Democratic Governor (and predatory lending lawyer) Roy Barnes tried hard for those protections when he was in office, only to have them later rolled back.  Will this latest crisis change that calculation?  Probably depends on the next governor, who might be - Roy Barnes.  Predictions about how that race might come out are probably beyond even Krugman's prognosticating skills.

Jamie Baker Roskie