When Does a Recession Become a Depression?

Answer: A few months ago.

How do I know?

Let's look at the evidence.

1. Mere recessions are generally triggered by pricing shocks; depressions by the collapse of a credit bubble.

2. Mere recessions do not require the effective nationalization of the pillars of global finance.

3. The national housing industry has been in a full-fledged depression for more than two years now without any evidence it has reached bottom.

4. The usual market mechanisms for liquidating insolvencies are not operational.

Much is made of comparisons to various post-Great Depression downturns as guidance to the likely path of this current crisis. Most recent recessions have resulted from transitional shocks; anti-inflation monetary policy shifts in the 1950's, the oil price shocks of the 1970's, the interest rate squeeze on inflation leading to the "Carter/Volcker/Reagan Recession" of the early 1980's, the dot-com bubble bursting at the beginning of this decade. By definition, each of these recessions included a period of "negative growth" in the GDP and some degree of increased unemployment.

Statistically, we are well into another period of negative growth in our GDP and rising unemployment. Beyond this statistical similarity, the nomenclature of "recession" obscures a more profound difference. Like the Great Depression -- and unlike all of the interim recessions -- our current crisis is the result of a credit bubble bursting, characterized by a profound and pervasive insolvency throughout the international credit markets.

The scope of this systemic insolvency is breathtaking.

The United States alone has extended credit, loan guarantees, and cash infusions exceeding $1 trillion in an effort to head off the serial collapse of the world's largest financial institutions. While serial collapse has been forestalled for now, the scope of insolvency actually appears to be growing.

The pillars of US finance are generally not lending to one another except where compelled by the feds to do so.

Common sense suggests we are somewhere towards the beginning of a multi-year period of "negative growth" with no identifiable basis for recovery now in sight.

Consider the amount of time necessary to actually deleverage illiquid, loss mounting assets when there is no market for them. Unless these assets can be sold off to government, many will be held to maturity and swaps to cover risk of default will last as long. How can anyone determine the solvency of a financial institution under these circumstances? Under these circumstances, how can anyone imagine the private sector and traditional market forces can resolve this crisis?