WHAT if Japan's troubled banks were to suddenly sell off their United States Treasury bonds, creating an upheaval in international markets? To top American finance officials, that's a distinct possibility.
But now, if Sakura, Nippon Credit Bank, or others get really hungry for cash, there is a ready source - the US Federal Reserve Bank.
This is just the latest example of how the US central bank is taking on a new mantle as the chief guardian of America's economic security - at home and abroad. Already this year the Fed has played a key role providing emergency funds for Mexico in an effort to protect the US economy from an international threat. And with the coming debut of the freshly redesigned $100 bill, it is intent on curbing counterfeiting efforts, especially overseas.
The popular perception of the bank as the charter of monetary strategy alone has become outmoded. Since its inception in 1913, the Fed's control over interest rates and the cost of credit to American consumers and businesses has provided an important tool to help steady the course of the economy's growth.
But some Fed watchers balk at how far they believe the institution has deviated from its original mandate as purveyor of domestic financial matters, with no accountability to US policymakers. Others insist the Fed has simply evolved with the development of the global economy.
The staggering growth in cross-border financial deals has created new pressure on the Fed as regulator of banks and protector of the US dollar. The most dominant currency in international transactions, the dollar also makes up more than half of other countries' official foreign-exchange reserves. With all of that exposure, the central bank is on the lookout for potential disasters.
And where the US political process has all but strangled the ability of the White House and Capitol Hill to reach a timely agreement on budgetary matters - including foreign initiatives - the Fed has emerged as the quick response.
''To the typical Americans worried about their economic future, the Fed is an absolutely critical financial institution - far more than in the past,'' asserts Barry Bosworth, senior fellow at the Brookings Institution in Washington.
Even Fed insiders acknowledge that their domain is much broader than tinkering with monetary policy.
''The central bank is worried more about the health of the country, and the main issue is to prevent what led to a 1930s-style depression,'' a Fed official says. The globalization of markets has turned the central bank into a keen observer of developments outside US borders (such as a collapse of the Japanese banking system) that may have a negative impact back home, he says.
Announcing that the Fed is prepared to offer help to Japan's banks is part of ''our stock in trade,'' says the official. ''We were set up to prevent financial panics ... in order to stem an incipient panic, you need to state your own intentions ahead of time.''
House Banking Committee chairman Jim Leach (R) of Iowa, who was a central figure in the Mexican aid deliberations with Federal Reserve Board chairman Alan Greenspan earlier this year, also ''recognizes the pragmatism of providing liquidity to Japanese banks should the need arise,'' says a congressional aide. To Representative Leach and other Fed fans, there is no issue of the bank stepping out of bounds.
But Walker Todd, a 20-year veteran of the Federal Reserve System, challenges the legitimacy of the Fed's becoming ''the big nanny of the payment system of the whole world.'' Mr. Todd, a former senior official with the Federal Reserve Banks of New York and Cleveland, objects to ''the aggrandizement of power at the Fed and its taking advantage of the absence of will or financial capacity in other areas of government to see the loans [to Mexico and possibly to Japan] through.''
Prior to the 1980s, all international lending requests like Mexico's and Japan's were voted on in Congress as part of an appropriations process, he says. But today, the Fed is prepared to just ''march out the door with the money,'' by privately buying up treasuries in what should be a public transaction, Todd says. This sets a dangerous precedent, he warns, because unilaterally intervening in global financial markets by purchasing treasuries directly from Japanese banks instead of buying them on the open market alters ''the nature or function of our central bank.''
Todd chides the Fed chairman for losing his free-market approach. In testimony before the House Banking Committee at the height of the Savings & Loan crisis in 1991, Mr. Greenspan himself rejected the call for the Fed to supply the US government with money directly, without going to the marketplace. ''He articulated the proper economic reasons for the opposing the use of Federal Reserve money to fund either loans to the Treasury or to other government entities in the US - much less to foreign governments and banks - because such activities are properly within the domain of fiscal, not monetary policy,'' Todd says.
But a Fed official counters that ''it's misleading to present us as though we're just acting on behalf of Japanese banks. Are we saving the banks? Yes, but we're also saving the US [from economic harm],'' he says. ''We were set up to prevent financial panic.''
Still, economists like Mr. Bosworth of the Brookings Institution are puzzled by the Clinton administration's pledge of the Fed as a cash source for Japanese banks.
''The Fed does not have the legal authority to take on the role of declaring banks in foreign countries troubled and to go in to try to shore them up,'' he says. The Fed is well-aware of that limitation, he says, and he suspects that the central bank simply wanted to give people the impression that it could help those institutions ''in order to boost confidence in Japan's banking system.''
That said, Bosworth continues, ''there was no intention that the US is going to give taxpayers' money to bail out Japanese financial institutions in Japan - that would be too ridiculous to accept.''
Ridiculous, yes, agrees Todd, but not outside the realm of the Fed's undertaking. ''The Fed thinks its role is to protect against the failure of [Japanese banking operations here and in Japan] and none of that is legal. Where is there a statutory mandate for all, or any of that?''
When Mexico's financial crisis put US mutual funds in great jeopardy, Todd recalls, Fed chairman Greenspan worked Capitol Hill harder than during any time during his tenure at the Fed. At the last minute, when he saw that he would lose a congressional vote for the bailout plan, President Clinton abandoned efforts to seek lawmakers' support and authorized disbursement of the economic stabilization fund, financed in part by the Fed.
''Every time there is a financial crisis I would expect the Fed would come down on the side of intervening with taxpayers' money [in order to avoid potential financial collapse],'' Bosworth says.
''On this I don't take them to be the best source of advice because of their bias - their constituency is American financial institutions, which have a lot of risk in Mexico.''
''It's unprecedented, it's illegal, and it will always be cited,'' warns Todd. ''In 20 years, we could hear President Al Gore telling us that he's going to lend $50 billion to Brazil from an exchange stabilization fund. And he'll say: 'You can't tell me I can't do it because it's been done before - with Mexico and Japan.''