Former Treasury Secretary calls for emergency plan to prevent Treasury market collapse
Former Treasury Secretary Henry Paulson is warning that U.S. officials should be ready with a rapid-response plan in case demand for government debt weakens sharply, raising the risk of broader financial disruption.
Former Treasury Secretary Henry Paulson is warning that U.S. officials should be ready with a rapid-response plan in case demand for government debt weakens sharply, raising the risk of broader financial disruption.
Speaking in a recent interview on Bloomberg Television, Paulson said policymakers need a contingency strategy prepared in advance. “We need an emergency break-the-glass plan which is targeted and short term on the shelf, so it’s ready to go when we hit the wall,” he said.
His comments come as concerns build over the long-term stability of the U.S. Treasury market, which underpins global finance. Persistent federal deficits, rising debt issuance, and lingering inflation worries have all weighed on investor appetite for government bonds.
Paulson, who led the Treasury during the 2008 financial crisis, stressed that a breakdown in the bond market would present a very different challenge from the turmoil he once managed. During that earlier crisis, the government still had the financial capacity to step in and stabilize markets.
“In 2008, as bad as it was, the government had fiscal firepower to address the credit meltdown,” he said. “You can come in and clean up the mess.”
A future crisis centered on government debt, however, could limit that flexibility. If investors pull back from buying Treasurys, borrowing costs could surge, worsening deficits and creating a feedback loop that further undermines confidence.
Paulson described a scenario where the Federal Reserve becomes the primary or sole buyer of government debt as particularly dangerous. “When you hit the wall and you’re trying to issue Treasurys and the Fed is the only buyer and the prices of the Treasurys are going down and interest rates are up, that’s a dangerous thing,” he said.
Such a situation could push yields higher as investors demand greater returns to compensate for risk, making it more expensive for the government to finance itself.
While Paulson warned that the consequences of such a breakdown could be severe, he also acknowledged the uncertainty around timing. “People say, ‘When are you going to hit the wall?’ I obviously don’t know—it’s impossible to know,” he said, adding that “when we hit it, it will be vicious, so we have to prepare for that eventuality.”
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