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Monday, May 18, 2009

Russian Dachas and American Credit

Sixteen years ago while living in St. Petersburg, Russia I remember having a discussion with a good friend of mine regarding the extreme complexities of securing a home loan through the Russian banking system. She had been building a tiny home just outside the city for over four years at the time that I met her, and she planned on working for at least two or three more years before she would finally finish the diminutive structure. Every weekend and for a full two months every summer, she could be found from sun-up to sun-down laboring on her 800 square-foot dream home. As a spoiled American, I knew that I would never have to work that hard to obtain the home that I hoped to live in one day and I most certainly knew that I would not be the one to pour the concrete, install the toilets and tile the roof. While I greatly admired her persistence, endurance and willingness to wait almost a decade to enjoy the fruits of her labor, after two days of laying bricks and hand-mixing concrete I was really glad that those virtues were not necessarily the virtues that I have to exhibit in order to obtain my dream home.

Living in Russia, she did not have access to a vast network of banks and lenders like we do in America, so she did not even have the option to apply for a home loan. Since she could not obtain a home loan, all of her materials had to be purchased up front with the cash that she had been saving for almost a decade. The vast majority of the labor was done by her (a woman that had absolutely no building experience whatsoever), her friends (who also had zero experience) and occasionally, was obtained by bartering her services with someone who actually had enough knowledge to hang a few wires for the couple of lights she had in her house. The fact that all of this work was done by unskilled labor meant that much of the learning was done by trial and error.

My experiences in post-communist Russia helped me take a peek into what the world would be like without a well-functioning credit system. My husband is a dentist. After four years of dental school and two years of residency we had racked up a tremendous amount of debt to pay for all of his schooling. Toward the end of his residency he decided that he would be better off building up a practice from scratch rather than working for someone else for a few years, so he proceeded to call around to a number of lenders to secure funding. Amazingly, even with all of his student debt, he was approved for a $300,000 business loan within a few days. He had no job and no collateral...the only thing that he possessed were the skills that he attained while in dental school and the determination that he would one day pay it all back.

While some may look at my husband’s story as a prime example of the loose lending standards by American banks (lending standards that they believe led to the current crisis) it is banks like the one that he went to in order to obtain a business loan that separate us from the desperation and despair that I saw so often in Russia. Without the ability to borrow the cash needed to obtain the proper equipment, his productivity would have severely been hindered since his lack of funds would drive him to work with outdated and inefficient dental equipment and limit the number of operatories that he could fully equip. In fact, without our credit system, my husband would still be working at Geneva Steele in Orem, Utah since his parents were certainly not in the position to bankroll the $30,000 a year in tuition required to fund his dental school education. Come to think of it, it is doubtful that Geneva Steele would even be in existence since they most certainly required a massive outlay of cash to fund such an enormous project.

Unfortunately, success stories that are a direct result of our credit system are not being told by the media today. The current administration has made a point to demonize our credit system with constant accusations of chicanery and malfeasance.

With credit, we were able to hire a contractor to build our 5000 square foot home in less than 7 months. My Russian friend spent 7 years building what would be considered a shack by American standards. With credit, my contractor was able to hire a concrete company to bring in massive trucks filled with concrete, pouring my sturdy foundation in only a few days. My friend mixed all of her concrete by hand in a well-barrel, and poured it over a period of a couple months which resulted in an unsightly patchwork of concrete full of cracks, bumps and divots. With the extension of credit, the concrete company hired by my contractor purchased massive dump trucks that continually mix the concrete insuring that it maintain the correct levels of moisture uniformly throughout until the time when it needed to be poured. Unfortunately, my friend did not have that same benefit, so she deals with the headache of water seeping in through her foundation every time it rains.

While the Obama administration claims to understand the pivotal role that the free flow of credit plays in the immense success of our nation, I am not confident that they understand some of the basic principles that made it so that capital flows so freely in our country. Our government’s exceptional track record of enforcing contracts impartially and securing private property rights in the past has allowed the credit markets to deepen and expand to the point where they are accessible to just about every American citizen, not just the rich. But the growing attacks on the entire banking system (credit card companies, hedge fund stock holders, Chrysler’s bond holders, TARP banks wanting to pay back government loans) makes me believe that in the not-too-distant-future our market will be filled with timid lenders nervous to take the kind of risks involved with loaning funds to individuals.

They certainly have good reason to be nervous...all indications are that the current administration does not respect contracts that were entered into freely and does not see the need to enforce them impartially. The most advanced instrument for the formation and creation of wealth ever devised was the invention of our credit markets…with all of the credit bashing going around, I am very nervous that the powers that be are about to destroy the instruments of wealth so vital to our economy.

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