Other economists were quick to take issue with a report last week by Edward Yardeni of C.J. Lawrence/Deutsche Bank Securities Corp. that blamed U.S. banks for a global capital crisis.

With the banks still smarting from Third World debt problems from the 1980s, Mr. Yardeni in his weekly economic analysis took them to task for their reluctance to lend overseas.

With Japanese banks ailing, and U.S. banks meeting 55% of domestic loan demand with proceeds from their overseas operations, there is not enough capital to go around, he said.

As a result, the Third World's expansive plans to build new infrastructure, from roads to electricity, are being short-circuited, he said.

"American bankers are not aggressively lending or participating in syndicated global lending," he said. "In fact, U.S. banks may be contributing to the global capital shortage by funding more than half of the growth in U.S. bank credit with net funds raised from overseas offices rather than domestic deposits."

Back in the Game

Other economists conceded that U.S. banks have been somewhat reluctant to lend overseas, given their abysmal record, but said they were now getting back into the game.

"American banks seem to have gotten re-enthused about overseas lending," said Ken Ackbarali, senior economist at First Interstate Bancorp.

Mr. Ackbarali pointed to global trade treaties, like the General Agreement on Trade and Tariffs and the North American Free Trade Agreement as providing potential boons to global finance.

Jeffrey Thredgold, senior vice president and chief business economist at Keycorp, also said U.S. overseas bank lending is on the upswing.

"What you are finding is a greater willingness of banks to lend internationally -- not to foreign governments, but to facilitate global trade," he said.

Relationship Building

In the past, banks lent almost exclusively to governments, Mr. Thredgold explained. But now, looking to solidify customer relationships, banks are lending to U.S. and foreign customers overseas, he said.

Lacy H. Hunt, chief economist with USA, HSBC Holdings, said competition was strong for loans but noted that banks are now lending out of their overseas branch offices, and not from the United States.

Rather than just buying into an artificial syndication, he said, banks are emphasizing personal relationships. As a result, the loans are made directly from the overseas units, and not from the home offices.

Mr. Yardeni pointed to this phenomenon to explain why overall foreign lending was not weak for U.S. banks. For example, Chemical Bank arranged $81.2 billion of overseas loans during the first half of the year, according to the International Financial Review. And all top five international bank lenders were U.S. banks.

Foreign Banks' Weakness

Mr. Yardeni said that statistic only emphasized the weakness of foreign banks, and said most of the U.S. loans originated from overseas.

"You don't see bankers falling all over each other to make loans the way they did in the 1970s and 1980s," he said.

Mr. Yardeni also said long-term bond yields would fall below 7% by the end of the year.

"I'm just an old-fashioned kind of economist who believes that falling inflation rates all around the world should be associated with falling, and certainly not rising, bond yields," he said.

The high level of interest rates reflects heightened inflationary fears, he said. Rates should come down as these fears recede, he said.

On bond yields, Mr. Yardeni found some company. Mr. Hunt agreed that yields would fall below 7% by yearend, but for different reasons.

Signs of Slow Growth

Consumers are retrenching, the housing sector is flattening, and there are sign of reduced capital spending, he said. If not for increased electricity production brought on by the summer heat wave, he continued, industrial production would have been stagnant in the last quarter.

"These are classic signs of slow growth," he said. "Things are looking better for the bond narket."

Mr. Thredgold of Keycorp saw it differently, however. At best, he said, yields will stabilize at their current levels, though yields are likely to rise in the next few months, possibly as high as 8%.

Cashing In Bonds

Mr. Thredgold expects the economy to slow down, inflation to be moderate, and the dollar to stabilize. But in the near term, he advised, expect the Federal Reserve to boost short-term interest rates 50 or 75 basis points.

Mr. Yardeni said the global capital shortage and high long-term bond yields were linked. Because of the global capital shortage, he said, investors are selling bonds to raise funding.

"The global capital shortage story is compelling," he said. "It certainly explains why the bond selloff has been so severe and so global. It also explains why bond yields have soared in so many countries at the same time that inflation has continued to move lower in these same countries."

Mr. Hunt countered that there is no global capital shortage. Global lending is a regional issue, he said, and capital flows to where it is needed.

Currently it is needed in Asia, excluding Japan, he said. Demand is beginning to recover in Europe, he added.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.