Central bank crisis tools may be fueling the next blowup, WSJ warns

Central banks may be inadvertently encouraging excessive leverage and subsidizing government borrowing through the very emergency facilities they created to prevent market meltdowns, according to an analysis published Saturday by The Wall Street Journal News Corp ↗ 0.73%.wsj

The report argues that by expanding their role from lenders of last resort to market makers of last resort during the 2008 and 2020 crises, central banks have set in motion a self-reinforcing cycle: emergency interventions reduce perceived risk, encourage greater debt accumulation, and make future crises more likely — and more costly to contain.federalreserve

The Leverage Buildup

Hedge funds sit at the center of the concern. Their U.S. Treasury holdings reached $2.4 trillion at the end of 2025, up from $600 billion a decade earlier, according to estimates from the Federal Reserve Bank of Dallas. A June 2026 Federal Reserve research note found that highly leveraged arbitrage strategies — particularly basis trades and swap spread arbitrage — account for nearly half of those long positions.federalreserve+1

Some funds deploy leverage of up to 100 times their capital to profit from small pricing differences between government bonds and related futures or swaps. Apollo Global Management ↘ 1.96% noted in April that hedge funds now own a record 8% of U.S. Treasuries, warning that "any forced unwind of these leveraged positions could send shockwaves through global fixed income markets."apollo+1

The Moral Hazard Trap

Bank of England Chief Economist Huw Pill warned that mechanisms introduced to reduce financial vulnerability could create new weaknesses. Central bank assurances that repo and government bond markets will remain liquid make it easier for leveraged investors to finance trades whose buying, in turn, pushes government bond yields lower — effectively reducing borrowing costs for the state.investing

The arrangement holds until markets turn sharply and highly leveraged positions unwind. Central banks may then need to intervene again, reinforcing expectations of future support and encouraging the next buildup of risk. The collapse of Treasury basis trades helped trigger Federal Reserve intervention in March 2020.investing

Searching for a Better Model

Pill pointed to the Bank of England's temporary gilt purchases during Britain's 2022 pension-fund crisis as a more targeted approach — one that halted forced selling without abandoning broader monetary tightening. The Journal also cited the Fed's 2023 Bank Term Funding Program as a cautionary example: the rescue facility was later used by healthy institutions as cheap funding, forcing officials to tighten its terms before it expired.investing+1

The challenge, the analysis concluded, is designing facilities that restore market liquidity during emergencies without providing a standing guarantee that rewards excessive risk-taking — a problem that, for now, remains unresolved.wsj