Megan McArdle said a few days ago:
My reasoning for thinking of this as a depression, rather than a recession: roughly, that we don't understand how to get in or out of it.
I have no doubt that unwinding serious problems with mortgage loans and the housing bubble would have pushed us into some kind of recession. But one can easily argue that the bank failures in the 1980s and the housing market in places like Texas were far worse in the 1980's than they were in late 2008. In fact, there is a fair amount of evidence that current mortgage and foreclosure problems are mainly limited to 4 states (Arizona, California, Nevada, Florida).
If one argues that we now have something worse than a run-of-the-mill recession (which I am still dragging my feet on admitting), then I think I know the cause: economic hypochondria. Yes, we may have a cold, but we have convinced ourselves it's cancer.
It all began with one man: the US Treasury Secretary. Who decided in October to scream to all the world that the US and all its financial institutions were facinig systemic disaster.
FDR did at least one thing I thought fairly clever. One day, he declared a bank holiday, and told the country he was going to inspect all the banks. And a few days later, a few were closed and the rest opened up, suddenly certified by the US Government as healthy. He did exactly the opposite of Paulson - he faked it. No way he really knew if all the other banks were healthy, but he saw a crisis of confidence and he bluffed. The same way, in fact, Jeff Skilling bluffed (and went to jail for) when he faced a liquidity crisis and the leaders of Bear Stearns and many others have this year as well. But Paulson screamed to the world "liquidity crisis" and we may not know much about how to get in and out of them, but we do know that such a statement is usually a self-fulfilling prophesy.
Once Paulson struck the match, everyone else had a reason to contribute to the fire. Obama loved it, because a financial crisis could be laid at the door of Republicans. The media loved it, because they always like to headline pending disasters and it supported their guy Obama. Banks learned to love it, as they soon found that if the country bought the "disaster" story, they might get free government handouts. And then GM and others saw an opening to stampeded the government into more handouts. In one of the great ironies of all time, the looming depression became the greatest gravy train of all time, spawning what literally will be the largest pork-fest in all of history.
So what do the rest of us think? Well, we might still have our jobs, but it sure seemed like we might lose them soon. Just watch the news. And our company joined right into the panic. I have cut expenses and jobs like crazy in anticipation of a drop in revenue I haven't even seen yet!
Can I prove that this is anything more than just a libertarian fantasy-rant? Not really. The only potential proof I can offer is as follows. If my story is correct, then we should see layoffs occurring faster than actual drops in output. We should see job cuts in anticipation of, rather than as a result of, falling demand. To which I offer these two charts, via Alex Tabarrok:
Postscript: To be fair, economists who look at this stuff much more deeply were calling out deep problems long before Paulson screamed fire in a crowded movie house (example). I am not say we would not have had a recession, but the speed and depth of the drop may well have been affected by his mismanagement.