NEW YORK (TheStreet) -- If the Greece and Puerto Rico debt crises cause worldwide panic, scaring investors and causing liquidity to dry up, the U.S. Federal Reserve just might step in to help, becoming, in essence, a central bank to the world.
You read that right: The Fed must be prepared to help maintain liquidity in world markets. There's precedent.
The Federal Reserve was very active in during the Great Recession in supplying reserves to other central banks throughout the world through central bank liquidity swaps, which are deals with foreign central banks that allow the Fed to use their capital to provide liquidity in the U.S. -- and visa versa. According to the Federal Reserve's H.4.1 statistical releases, swaps were provided to central banks after the economic recovery began in the United States as other nations continued to face their own recovery problems.
Furthermore, the Federal Reserve also increased excess reserves in the banking system by more than $2.5 trillion during the economic recovery. Tracing how the banking system used this liquidity through the Fed's H.8 statistical releases, one can observe that banks channeled well more than $600 billion of these reserves to off shore uses, primarily to supply liquidity to the banks not located in the U.S.
The classical response of the central bank to investors running for safety when times get uncertain is to make sure that banks and financial markets are sufficiently liquid so that further problems don't exacerbate the existing situation.