The U.S. is coming to Europe's financial rescue.
So far, America's role is fairly limited. But if the crisis continues to grow and the U.S. takes on a wider role, U.S. consumers and taxpayers could feel a bigger impact. The biggest exposure could come from America's status as the single largest source of money for the International Monetary Fund.
The latest round of American financial assistance came Thursday with a promise by the Federal Reserve to swap as many dollars for euros as European bankers need. In the short run, those transactions won't have much impact because the central banks are simply swapping currencies of equal value. If the move helps avert a wider crisis, it could help spare the global economy from another recession.
But over the long term, consumers could feel the impact of central bankers flooding the financial system with cash, according to John Ryding, chief economist at RDQ Economics.
"This is a lender of last resort function," he told CNBC. "With the dollar injections that the Fed has done, it's like giving a patient medicine with really bad side effects." Ryding said the bad side effect in the U.S. has been inflation, which has picked up to 3.8 percent year over year.
Fed policymakers meet next week to decide whether the flagging U.S. economy needs another round of easy-money measures that could include buying more Treasury bonds to push more cash into the financial system.
So far, no one has floated publicly the idea of the U.S underwriting a broader bailout of the European financial system. But Senate Republicans have already voiced concerns over such a move.
"Our concern is that innocent American taxpayers will pay for yet another bailout -- this time to one or several countries whose spending and debt choices led them to financial calamity,” Sen. Orrin Hatch, R-Utah, and seven other Republican senators wrote in a letter to Treasury Secretary Timothy Geithner in June.
The source of the senators' concern is an emergency provision, approved by the Group of 20 industrialized nations in 2009, granting the IMF broad powers to expand its lending authority. That could leave American taxpayers on the hook for any IMF loans that later go bad.
In July, Geithner sought to reassure the senators that won't happen.
"The United States has never experienced a loss on its IMF commitments," Geithner wrote. "The IMF's claims are recognized by Europe to stand ahead of all others. This, along with the IMF's strong financial resources, provides further assurance that our claims on the fund are secure."
On Friday, Geithner made an unprecedented trip to meet with European officials who are wrestling with the creation of a bailout fund similar to the U.S. government response to the Panic of 2008. With European Union leaders deadlocked for over a year, Geithner, one of the architects of the U.S. financial bailout in 2008, urged the group to move more aggressively to solve a widening debt crisis that threatens to send the world back into recession.
Investors have become increasingly worried that a $740 billion euro EU bailout fund isn't big enough to cope with potential losses if Greece and other countries default on their debts, wiping out those assets held by European banks. With richer countries like Germany and France unwilling to commit more funds, Geithner wants the Europeans to boost the existing bailout fund's firepower. One idea would be to use the money just to guarantee losses from bond defaults rather than buying up the bonds themselves.
European officials are running out of ideas. This week, German Chancellor Angela Merkel shot down the idea of a unified Euro bond that would be substituted for the debt issued by individual nations.
After a year and half of failed attempts at a solution, the world economy has entered a “dangerous new phase” IMF Managing Director Christine Lagarde said in a Washington speech Thursday.
So far, the IMF has played a supporting role in a "troika" of agencies working to head off a Greek default that include the European Central Banks and the European Union. With Greece approaching a cash squeeze at the end of this month, those agencies are demanding deeper "austerity" measures - budget cuts of higher taxes - before releasing those funds.
As the largest shareholder, the United States provides the biggest single source of funding to the IMF. The ownership stake also gives the U.S. veto power over IMF funding decisions. Geithner is a member of the IMF board of governors. Fed Chairman Ben Bernanke is an alternate governor.
IMF funding requires congressional approval. But following the financial crisis of 2008, the Group of 20 countries approved a plan to give the IMF emergency borrowing authority, a program known as New Arrangements for Borrowing, which tripled the IMF's lending authority to $750 billion. The borrowing authority is set to expire in November.
Here is the latest on the crisis from CNBC's Michelle Caruso-Cabrera in Wroclaw, Poland:
CNBC's Michelle Caruso-Cabrera has the details on Treasury Secretary Timothy Geithner's trip to Poland to meet with Eurozone finance officials.