We develop a model of financial crises with both a financial amplification mechanism, via frictional intermediation, and a role for sentiment, via time-varying beliefs about an illiquidity state. We confront the model with data on credit spreads, equity prices, credit, and output across the financial crisis cycle. In particular, we ask the model to match data on the frothy pre-crisis behavior of asset markets and credit, the sharp transition to a crisis where asset values fall, disintermediation occurs and output falls, and the post-crisis period characterized by a slow recovery in output. Our principal finding is that both the frictional intermediation mechanism and fluctuations in beliefs are needed to match the crisis cycle patterns. A pure amplification mechanism quantitatively matches the crisis and aftermath period but fails to match the pre-crisis evidence. Adding a diagnostic model of belief fluctuations that overweighs recent observations fits the crisis cycle facts both qualitatively and quantitatively. A Bayesian belief updating process fits the facts qualitatively but misses the extent of pre-crisis froth quantitatively. In contrast, a lean-against-the-wind policy has a quantitatively similar impact in both versions of the belief model, indicating that policy need not “get into the minds” of investors and condition on the true belief process.