Econ for Dummies

What is a depression? How is it different from a recession? How does a recession or a depression occur? What is so troubling about the whopping number of home foreclosures? What does it all mean? Now I'm going existential...but these are some questions that have been floating around in my head these past couple weeks. Why?

The state of the economy has been making headlines lately, and I have no idea what the big deal is. For instance, a couple posts ago, I mentioned something I heard on NPR: "Now that analysts have finally determined that we are in a recession..." The second half of that sentence was "should we be talking about a depression?" As in, like the Great Depression of the 1930's. The expert that was interviewed for this segment basically said that all the signs were there, so yes, we should be bracing ourselves for the grand economic slam.

Damn, Armageddon's coming, so why do I feel so indifferent? Maybe it's because I don't own a house yet. Or maybe it's because the guy on NPR was over-exaggerating. Or maybe it's because I still don't understand what a depression or a recession is or how it all works. Like how does a troubled housing market signal a recession and a possible depression?

It was not until I read this Times article today that I finally began to understand what it all meant. Also the message in this article was quite the opposite of the NPR dude. It painted a much rosier picture of our economic situation, and basically made the case that the possibility of a repeat of the Great Depression is close to nil because the government is plugging the leaks before they turn into craters- unlike during the '30s- and they've been putting up such "safety nets" as Social Security and unemployment benefits since the post-Great Depression era, having learned their lesson.

So breathe easy folks! (Not that you were going to go out and buy that big-screen or Honda anyway, right?) According to the article, the sign of a true depression is when banks start failing en masse just when unemployment levels are booming. That is when we should all join the Great Bank Run, just as Jane and Michael did in Mary Poppins. And FYI:

Recession: A significant decline in economic activity, lasting a few months;

Depression: A much more significant decline in economic activity, lasting much longer.

To be honest, I'm a bit suspicious of the overly-positive message of the Times article. I mean, the government is plugging the leaks, but the fact that there are leaks- serious ones like the near-bankruptcy of major Wall Street securities firm Bear Stearns- should not be taken too lightly. The reality of the situation is probably somewhere between it and the NPR dude.