Posts Tagged ‘Georgia’

Georgia and the Flatland Myth

The New York Times’ Paul Krugman is the latest opinionator to pick up on my story for The Big Money about how Texas avoided the worst of the foreclosure crisis. He comes at the question from another and equally interesting angle: Why does Georgia have so many bank failures?

After all, Georgia, like Texas, is part of “Flatland,” Krugman’s coinage for the soft inner tissue of the U.S. — as opposed to the hard crusty coasts with all their development restrictions — where governments more readily permitted real estate development to sprawl where it pleased. Basic economic theory would suggest that in less regulated environments, supply is less constrained than it is in highly regulated building environments, and therefore housing prices would be less prone to inflate under speculative pressure. Hence California, Florida; Nevada and Arizona are a little harder to explain but spillover of investors from the California boom are supposed to explain it.

But I think Krugman’s Flatland theorette neglects how aggressively demand, put on steroids by the tsunami of debt that the securitization and derivatives markets unleashed, defeated the power of supply constraints in many markets, and Georgia is a perfect example of that. Those small, now failed banks that Krugman writes about today financed an unbelievable volume of real estate construction all over the Atlanta region, some 75,000 permits a year at its peak – condos, McMansions, loft conversions, anything, anywhere. And as I explain in Our Lot, those developers from very early on – we’re talking 2001 – engaged in elaborate mortgage fraud schemes to “sell” these units. Entire subdivisions and condo developments were sold this way so that developers could pay back their construction loans to local banks. But many of them couldn’t — hence Georgia’s distinction as the nation’s bank failure capital.

Monday, April 12th, 2010 | Tags: , ,
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