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The 1966 Financial Crisis: Financial instability or political economy?

L. Randall Wray

Review of Political Economy, 1999, vol. 11, issue 4, 415-425

Abstract: The credit crunch of 1966 has long been recognized as the first significant postwar financial crisis, and it was the first verification of the ''financial instability hypothesis'' that Minsky had been developing since the late 1950s. In the midst of the robust post-war expansion, the Fed tightened monetary policy to the point at which profitability of financial institutions was threatened. The Fed was forced to intervene to save the muni bond market, which in effect validated practices that were stretching liquidity. As a result of Fed intervention, the economy continued to expand, new financial practices emerged and were validated, leverage ratios increased, memories of the Great Depression faded, and markets came to expect that big government and the Fed would come to the rescue as needed. That 1966 crisis was only a minor speedbump on the road to Minskian fragility - a transformation from a ''robust'' financial system toward the current ''fragile'' financial system.

Date: 1999
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Handle: RePEc:taf:revpoe:v:11:y:1999:i:4:p:415-425