As we look for ways to prevent future financial crises, many questions should be asked. Here’s one you may not have heard: What’s the matter with Georgia?
I’m not sure how many people know that Georgia leads the nation in bank failures, accounting for 37 of the 206 banks seized by the Federal Deposit Insurance Corporation since the beginning of 2008. These bank failures are a symptom of deeper problems: arguably, no other state has suffered as badly from banks gone wild. 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.
Most of the post-bubble hangover is concentrated in states where home prices soared, then fell back to earth, leaving many homeowners with negative equity — houses worth less than their mortgages. It’s no accident that Florida, Nevada and Arizona lead the nation in both negative equity and mortgage delinquencies; prices more than doubled in Miami, Las Vegas and Phoenix, and have subsequently suffered some of the biggest declines.
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. It was fun while it lasted. Then the music stopped.
Why didn’t the same thing happen in Texas? The most likely answer, surprisingly, is that Texas had strong consumer-protection regulation. In particular, Texas law made it difficult for homeowners to treat their homes as piggybanks, extracting cash by increasing the size of their mortgages. Georgia lacked any similar protections [and the Bush administration blocked the state’s efforts to restrict subprime lending directly]. And Georgia suffered from the difference…
On the subject of using your mortgage as a "piggy bank" in Georgia, I have a story on my own. Somewhere in the mid 1990’s, the confluence of an over-budget attic renovation, college tuition, and a wife that stopped working, created a perfect storm and money got tight. We decided to refinance to cover the problem. My wife began to look around for mortgages and something very strange happened. The Banks began to call us and bid on the mortgage, offering complex packages and increasingly better interest rates. We set up a spread sheet that took the various aspects of the offers [interest rates, "points," closing costs, etc] and came out with the real bottom line. She would go to the computer with her spreadsheet and return her bank calls, holding out for a better deal. This went on for a while until we decided it was as low as it was going to go. Once we accepted one of the loans, you’d think it would’ve stopped, but the Banks kept calling for quite a while. I had no idea about what subprime loans were or what a housing bubble was, but I knew it was mighty fishy. We avoided all the "odd" loans outright – balloons, etc. So when I read "High-flying bank executives aggressively expanded lending," I can personally relate. Back then, I didn’t know Georgia was "special."Later, we sold our house [on the rising cusp of the "housing bubble"] it turned out and made quite a profit [Krugman is wrong – there was a huge "bubble" in in-town Atlanta house prices]. I am a person who doesn’t think about money a lot and have little "business sense." But in those days, I thought of myself as a shrewd guy: getting Banks to bid against each other for a mortgage; selling my house for an unimagined profit. I was neither shrewd, nor a mogul. I was just in Georgia at the right place on some very wrong curves – only illusions. I didn’t know about any of it – cdo’s, credit default swaps, derivatives, financial bubbles, deregulation, AIG. Like most Georgians, I was just living my financial life through rose colored glasses that I didn’t even really know I was wearing.
When I look back on those salad days here in Georgia, I feel kind of guilty – not just for my "good fortune" – but for not listening to the music and stopping to find out what it all meant. I knew there was something mighty strange for Bankers to be competing to refinance my house. I really knew that the later profitable sale of our house was cashing in on a boom of some kind [once we decided to sell, I was like a cat on a hot tin roof until it sold and closed]. But there was something else. I balked at buying a full sized house [a "grown-up" house] to retire to. Instead I cut a deal with my wife to pretend our small [already paid for] "weekend cabin" was a real house in return for doing a lot more of the traveling she loves than I would’ve otherwise tolerated. I just didn’t want to put money into property – an intuition in an area where I don’t have intuition.
So I did "know." I think we all sort of knew, or should have known. Our Banks kept growing and buying each other. Our mortgages kept changing places. Our house values and retirement plans kept on growing. Loans were cheap and infinitely available. We looked at the Stock Market like it was a Savings Account in a very generous Bank. Taxes were low. Alan Greenspan was still the wizard, the oracle. I think that must be the stuff of financial bubbles – an irrational exuberance to quote Greenspan’s phrase [that Robert Shiller explained to us in his book by that name]. When times are good, we act as if it’s going to be forever. Like people who live on the fault lines of the earth, we act as if earthquakes are a thing of the past, like we have a right to our earthquake free life. Maybe a better term would be an irrational denial.
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