"..If every few years you got the flu and now you had a strep throat it would be incorrect and possibly dangerous to think that you just had a bad case of the flu this year. Over the last hundred years there have been numerous recessions but only two depressions, the depression of 1929-1941 and the depression that began in 2007. The symptoms of strep throat and scarlet fever may be similar to that of the flu or common cold. However, causes of the former are the streptococcus bacteria while influenza is viral. Hence, strep throat and scarlet fever require antibiotics which are useless against viruses. Likewise, believing that the depression that started in 2007 is just a severe recession is quite dangerous to both investors and policy makers. As long as many policy makers appear not to realize the distinctions between recessions and depressions, investors ignore those distinctions at their peril.

The effects of the 2007 depression are much less severe than the 1929-41 depression because of safety-net benefits now provided. Consider the horrendous, though not uncommon situation of a household in 1932 comprised of elderly grandparents being supported by their working-age children with young children of their own, when the breadwinners became unemployed. The 1932 family would be destitute. Today the grandparents would have social security and Medicare benefits. Their working-age children could now collect unemployment benefits for up to 99 weeks. Additionally, the entire family could also be eligible for food stamps, Medicaid, rent subsidies, heating fuel subsidies, free school lunches and other benefits. The 1932 family might also have had a bank account in one of the many banks that failed and lost their savings. Today, Federal Deposit Insurance protects such bank accounts. You might say we are now in a depression with benefits.

The difference between a depression and a severe recession are not just semantic. Recessions occur when the Federal Reserve raises interest rates in an effort to slow down an overheated economy. Most importantly, recessions end when the Fed lowers interest rates. In a recession the pent-up demand for housing and durable goods means that monetary policy alone can cure the recession. Just as antibiotics can be effective against bacterial infections but not against viruses, monetary policy alone cannot end a depression. Furthermore, modest fiscal stimulus and the automatic stabilizers that can hasten the end of recessions cannot end a depression. There can be ups and downs in the unemployment rate during a depression. However, the unemployment rate remains elevated. It was 14.5% in 1940 and 9.7% in 1941.

If we are in a recession, economic activity will fully resume just from the monetary and fiscal stimulus that has already occurred. Ultimately interest rates will rise. However, if we are in a depression, even one with safety-net benefits that mitigate the hardships, interest rates will remain relatively low for decades as was the case in Japan and the USA of the 1930s, where only World War II ended the depression..."

http://seekingalpha.com/article/1543642