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The question turns on what we mean by global finance. In 2008 the dollar shortage was confined largely to the banks of Europe and America. That is the Fed’s historic comfort zone, the cradle within which it was born a century ago. The coronavirus crisis explodes that 20th-century framework and poses the question: How does America’s central bank supply dollar liquidity to a polycentric world economy?
“Liquidity swap lines” are the main way to pipe dollars into the global financial system. These were first deployed in the 1960s, when they were used to circulate funds between central banks struggling to uphold the fixed exchange rates of the Bretton Woods system. Essentially, central banks credited each other with matching amounts of currency: A Deutschmark credit for the Fed at the German Bundesbank was offset by a dollar credit for the Germans in the United States.
In 2007, a new type of dollar shortage emerged — not a shortage of official reserves, but a shortage on bank balance sheets. Europe’s banks had taken on huge amounts of American subprime debt. They had made hundreds of billions of dollars of loans without having a depositor base in the United States to match. To fund the loans, they borrowed dollars in wholesale money markets or swapped euros, Swiss francs and British pounds for dollars. As the markets panicked, those sources of dollar funding dried up. This risked unleashing a chain reaction in which the European banks would sell off their American investments, further accelerating the panic in American markets.
