The Causes and Consequences of the Misdiagnosis of the Financial Crisis in the United States

Using an analytical framework that divides banking crises into ‘classic’ and ‘secondary’ crises, this article analyzes the banking crisis that broke out in the United States in the summer of 2007 and the response of US authorities. While quite simple in itself, this framework allows for a novel interpretation of the unfolding of the crisis and for evaluating US authorities in the design and implementation of crisis resolution mechanisms. As suggested by the title, the principal hypothesis of the article is that the crisis was fundamentally misdiagnosed, leading to a flawed bailout that all but guarantees its inefficacy in bringing the US financial system back to health at a reasonable fiscal cost.