Krugman: Georgia v. Texas, Banks' Irresponsible Behavior And Consumer-Protection Laws

Paul Krugman has a thought-provoking piece in the New York Times entitled Georgia On My Mind. He makes two points: first, that Georgia leads the nation in bank failures and is much worse off in terms of mortgage delinquencies than Texas, which has -- surprise! -- better laws for consumer protection.

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.

Krugman's second point is a rebuff to those obsessed with "too big to fail," who seem to think that the nation's financial woes can be solved by breaking up the big banks. In Georgia, he points out, it was small banks that behaved irresponsibly. In a further criticism of conventional wisdom, Krugman says, it wasn't complex financial derivatives that caused Georgia's problems: it was "old-fashioned loans gone bad."

Krugman suggests that a key part of economic reform must be strong consumer-protection laws -- hooray for Elizabeth Warren!

And the contrast between Texas and Georgia suggests that consumer protection is an essential element of reform. By all means, let’s limit the power of the big banks. But if we don’t also protect consumers from predatory lending, there are plenty of smaller players — both small banks and the nonbank “mortgage originators” responsible for many of the worst subprime abuses — that will step in and fill the gap.