Fight of words: R Vs D

We all are familiar with ongoing financial crisis, but most of us don’t know whether to call it a financial recession or depression. I have seen many articles, papers where there is confusion between with what to quote current crisis with “recession or depression”.

Before finding an answer to this, let’s find out difference between the two:
On searching on various search engines the basic difference which, I got is as follows:
Recession: an extended decline in general business activity, typically three consecutive quarters of falling real gross national product.
Depression: a decline in real GDP that exceeds 10%, or one that lasts more than three years.

Therefore the above definitions indicate that the basic criteria of indentifying depression or recession are to measure extent of economic decline. A depression is simply a magnified version of recession. The last two depressions in the U.S. were both in the 1930s. From August of 1929 to March 1933, real GDP declined by approximately 33%. There was a period of recovery following this depression, but in 1937-38 the economy dipped again in a less severe depression. All other economic downturns since that time have been recessions or just plain old tough time.

Transpose of Recession to Depression
Recessions gets transformed into depression, when government applies wrong measures in controlling it.
According to James Pethokoukis, "4 Ways to Turn a Recession into a Depression (U. S. News 11/4/08), there are ways that good and bad policy can effect an economic downturn.
· Bank closures
Although the American taxpayer may well have to provide what is being called, "the mother of all bailouts" the Federal Reserve has already committed $7 billion to prevent the collapse and run on the banks. It has also raised the federal deposit insurance (FDIC) from $100,000 to $250,000 to discourage shaking depositors from withdrawing their cash.
· Increasing of taxes
During the period of great depression, according to the revenue act tax rate was raised from 25% to 63%. Economists regard this as one of the most inaccurate steps taken.
· Hawley –Smoot Tariff
As businesses were slowing down, to protect its own industries American government created a Hawley-Smoot tariff in 1930, which meant to charge high import tariffs on imports, this led to deterioration in global trade leading to economic retaliation.

New distinction between Recession & Depression
However there are economists who differ from above definitions of recession and depression. in present times they believe that difference between a recession and a depression is more than simply one of size or duration. In making distinction between the 2, cause of the downturn should also be taken into account. A standard recession usually follows a period of tight monetary policy, but a depression is the result of a bursting asset and credit bubble, a contraction in credit, and a decline in the general price level.
If we go back in past, economic downturns that followed the collapse of the Soviet Union and those during the Asian crisis were not really depressions according to this criterion. Another significant aspect of this distinction between a recession and a depression is that they call for different policy responses. A recession triggered by tight monetary policy can be cured by lower interest rates, but fiscal policy tends to be less effective because of the lags involved. By contrast, in a depression caused by falling asset prices, a credit crunch and deflation, conventional monetary policy is much less potent than fiscal policy and one tends fall into what is called as a “ liquidity trap”.
Present day situation
After all this discussion, the only question dwindle in our minds is “where we are today’? Well if we go by all definitions, America’s GDP may have fallen by an annualized 6% in the fourth quarter of 2008, and cause of this downturn is the largest asset-price and credit bubble in history—even bigger than that in Japan in the late 1980s or America in the late 1920s. So this means we are back to 1930’s?
Well many economists tend to deny this notion of 1930’s depression, because policymakers are unlikely to repeat the mistakes of the past. Though we are far off from situation of great depression, and policymakers won’t make same mistakes. But you never know they commit some new one’s as these are same policymakers who predicted that nationwide housing bubble burst is impossible, but today nothing is hidden, we all know the truth and truth is always bitter…..