The depression comes when they can't bail out the financial system.

That didn't happen this time, but the complete lack of structural change in banking means it is almost inevitable.

A lot of people (Mish, Denninger, etc) think that this is far from over and trillions more are involved. In addition, there are several bricks that could plausibly hit the pond anytime, given the chaotic economic and political conditions globally.

The most significant factor in a depression is not formally economic but psychological/political. A large number of people, at least approaching a majority, have to feel that there is a depression (market sentiment) and show this behaviorally (market fundamentals). We aren't there yet.

Right now, the dominant sentiment is fear of a depression and anger over the two-tier system. This is a political tinderbox.

They say that this part of the down turn is the end of a difficult period because inflationary head winds are gone.

They say that this particular down turn still has a lot of room to run, because credit and demand are in horrible shape, and that Q1 2009 should be worse than expected, because inventories of just about everything are stacked up.

For example, Kosuke Takahashi writes:

But that dollar strength may not last. Once people around the world start to think an excessive dollar supply will diminish the value of the currency, they may start selling dollar-denominated assets all at once, causing devastating damage to the world economy. This is why world leaders such as Japan's Prime Minister Taro Aso have repeatedly expressed support of the dollar in the international financial system, easing people's lingering concern over the greenback.

Early signs of the worst scenario for the US are already beginning to show. International demand for long-term US financial assets fell in November as foreign investors sold Treasury, agency and corporate debt, a government report showed on January 16. Net selling of all long-term assets in November was the most since August 2007, as investors sold bonds issued by Fannie Mae, Freddie Mac and other government-sponsored enterprises for a fourth month in the past five.

"For the moment, governments around the world are supporting the dollar key-currency system," said Masaki Fukui, senior market economist in Tokyo at Mizuho Corporate Bank Ltd, a unit of Japan's second-largest financial group by market value. "But there is still a deep-seated structural problem, causing some concern. We can never say a dollar crisis won't come."

When risk aversion begins to abate, as will happen at some point, the Fed needs to act quickly to drain excessive dollar supply, or money supply. Otherwise, the dollar will be doomed and hyperinflation and economic bubbles will occur once again, which could lead to a recurrence of the global financial crisis.

The temptation of dollar seigniorage

Others are saying that to maintain low rates, the Fed is going to have to become the buyer of last resort of Treasuries, since they are overpriced. The Fed will do this by monetizing, undermining the value of the dollar.

Chan Akya writes:

It is thus almost a dead certainty that the combination of wasteful Keynesian spending (if you will ignore the tautology) and supply-side effects would produce a sharp spike in inflation that is designed to buttress the ability of borrowers to repay their obligations while rendering the value of their payments almost moot for lenders.

Asians have saved a lot since the end of the Asian financial crisis, but will find an acceleration of wealth diminution upon them in months to come. Their only defense against this course of action that the G-7 countries have embarked on would be to boycott all debt issuances from the US and Europe over the near-term until yields rise fast and far enough to compensate for inflationary risks. Unless this can be pushed through, the only safe assets would be those that can hold a degree of their purchasing power,namely physical commodities and, of course, precious metals such as gold.

Keynesian bomb is ticking

These are takes from Asia, which has until recently been a major purchaser of US debt. Now they seem to be rethinking the value of the dollar and are suspicious of intentional depreciation.

will not last. That's why the time to do stimulus is now, and the time to restructure the banks was yesterday.

Fear of job loss is certainly pervasive, but the vast majority of people are hunkering down, controlling spending, and hoping for the best. We will need to see substantially more unemployment, with noticeable homelessness and hunger, before the average person considers this a depression. Unfortunately, it is the direction in which we are heading and appears an unavoidable end result of this collapse in credit. The depression carries the psychological and political element you refer to, and you're right - it will be absolutely explosive.

The fed will "print" $4 Trillion to establish the bad bank, buy all the bad debt a face value, and all the problem will be solved. Right? ...Right? ...Oh shit!

Recession markets decline somewhere in the neighborhood of 20%. Depressions are greater than 75%.

A panic sees a sharp decline of 40%. A panic is when everyone gets scared from all the bad news of a recession. If banks had maintained proper equity of 12.5% instead of where they let themselves get to, which was something under 4% we would not be in this mess. The delcine in GDP, the rise in unemployment, the default levels are all lower then in 1982, with the sole exception that banks were so much better capitalized then.

check the Panic of 1907. It reads almost exactly the same as the one we are in now:

The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in October, during which time the New York Stock Exchange fell close to 50 percent from its peak the previous year. Panic occurred during a time of economic recession, when there were numerous runs on banks and trust companies. The 1907 panic eventually spread throughout the nation when many state and local banks and businesses entered into bankruptcy. Primary causes of the run include a retraction of market liquidity by a number of New York City banks, loss of confidence among depositors, and the absence of a statutory lender of last resort.

As a result the short-term interbank lending that typically facilitates daily stock trades broke down, and brokerage houses unable to obtain these funds, the exchange began to crash. At 1:30 p.m. Thursday, October 24, Ransom Thomas, the president of the New York Stock Exchange, rushed to Morgan's offices to tell him that he would have to close the exchange. Morgan was emphatic that an early close of the exchange would be catastrophic. Morgan summoned the presidents of the city's banks to his office. They started to arrive at 2 p.m.; Morgan informed them that as many as 50 stock exchange houses would fail unless $25 million was raised in 10 minutes. By 2:16 p.m., 14 bank presidents had pledged $23.6 million to keep the stock exchange afloat. The money reached the market at 2:30 p.m., in time to finish the day's trading.

Although calm was largely restored in New York by Saturday, November 2, yet another crisis loomed. One of the exchange's largest brokerage firms, Moore & Schley, was heavily in debt and in danger of collapse. So despite normalcy returning by November, this further crisis emerged at Moore & Schley. Collapse was averted by an emergency takeover of the brokerage house approved by anti-monopolist president Theodore Roosevelt.

This is perhaps the elephant in the living room.

There is an argument that the difference between a recession and depression is a mismatch of new technologies and old technology. There is an argument that the amazing 'new' technologies of the 1910's and 1920's - electricity, telephone, motors, automobile, tractors, rail system - made the economy so rapidly productive, that millions of people were thrown out of their jobs faster than the creation of new jobs by these new technologies. There was a break in the creative destruction of the economy as the new technologies destroyed more jobs than they created.

There is some real truth to that considering at the beginning of the 20th century some 80% of people worked in agriculture where today it is something under 3%.

Fast forward and we have had two decades of computer and internet advances that have the potential now of destroying more jobs by far than they create. I could readily envision back in the 1990's that the internet had the potential to virtually eliminate investment banking - and little did I realize, that today investment banking - the brokerage houses anyway - are on their way to destruction.

It is one thing to connect one end of the country with rail and roads, quite another to instantly connect the world via thin fibers of sound and images, the ability to search anything anywhere. This connectivity could eliminate vast swaths of air transport, road transport. Computing today can map out an oil field in three days that just 15 years ago took six to nine months.

Which leave the question, asked so succinctly, where do we take off to when there is nowhere to go??

Obama and his team think energy. But that may not be enough. Efficiency can ad money to ones own pocket but at the expense of another. No net addition to the economy.

We will see.

There is no good correlation between productivity revolutions and economic crisis.

China and India have taken many more jobs from the U.S. than new technologies.

Those who have traveled have seen close up the grinding poverty in which much of the world lives. So it's hard to begrudge them a slice of the pie.

Americans complain about "wasteful foreign aid when there are problems at home," but even Americans living in inner ghettos live better than many who are considered well off in much of the world, as sorry as their lives are. Of course, you won't see this in the US media — although Slumdog Millionaire gives some insight into life in the slums of Mumbai and maybe will get some Americans thinking.

Globalization is based on competitive advantage, a pretty basic economic principle for increasing productive efficiency. Yes, there will be dislocation on the way, and the way should be managed to minimize these temporary imbalances.

However, the developed nations cannot hold onto their customary exploitation of the rest of the world to maintain and improve their relatively lavish lifestyle without seeing a backlash. We are already seeing it in the so-called GWOT, which is payback for perceived injustice, not "hate of our freedoms," as W misrepresented. Noam Chomsky, for example, has pretty thoroughly documented the agenda of US neo-imperialism that allows the US to continue its lifestyle through neocolonial exploitation.

Now Americans are demanding a beggar-thy-neighbor approach to the financial crisis that they underwrote by electing the corrupt officials who engineered this mess and then jumping on board without realizing that they were actually going underwater.

In the end, failure to deal with global challenges globally will be far more expensive in blood and treasure.