The credit crisis is 13-months old. Unfortunately, policy makers have been late to the game. In addition, the game plan has changed so many times that it is not surprising that there is a general lack of confidence that we can fix the problems.

Recent actions (equity injections, purchasing troubled assets) will take a number of months to implement. These actions are too late for the real economy. The damage has been done.

The relevant question is how deep of a recession will we see?

Given we are at the beginning, many Americans cannot understand what the big deal is. “Why do we need these bailout measures?” “I have a steady job and that’s not going to change.” “Why is all the focus on Wall Street?”

Stepping back to the past, we might have heard similar comments in the fall of 1929 and early 1930. The down cycle in the real economy had just begun and most had yet to feel its bite.

Indeed, we have not had a serious downdraft in the economy in almost 30 years. Many have forgotten the stress of a serious recession.

The last two recessions were mild by any standard. Both the recession of 2001 and the recession of 1990-1991 lasted only three quarters. The 2001 recession was so mild that there wasn’t even a year over year negative real GDP print.

Economists talked of the “great moderation” – which is code for the business cycle becoming much less volatile.

Enter today. While we might have dodged a recession if proactive actions were taken a year ago, there is little doubt that we are in a recession now.

Some have even talked about the D-word. But how do we classify a depression?

The National Bureau of Economic Research has been around since 1920 and published its first business cycle dates in 1929. The formal Business Cycle Dating Committee was constituted in 1978. On their website the NBER says that they date recessions not depressions:

“The NBER determined that the peak in economic activity occurred in August 1929, and the trough in March 1933. The NBER identified a second peak in May 1937, and a trough in June 1938. Both the contraction starting in 1929 and that starting in 1937 were very severe; the one starting in 1929 is widely acknowledged to have been the worst in U.S. history. According to the Bureau of Economic Analysis, real GDP declined 27 percent between 1929 and 1933, roughly ten times as much as in the worst postwar recession. If the term Great Depression is used to mean the period of exceptional decline in economic activity, it refers to the period from August 1929 to March 1933. If it is used to also include the period until economic activity had returned to approximately normal levels, most economists would judge that it ended sometime in 1940 or 1941. However, just as the NBER does not define the term depression or identify depressions, there is no formal NBER definition or dating of the Great Depression.”

It seems highly unlikely that we are headed for anything like -27% real GDP growth.

Feel like hedging that recession? On October 7, 2008, Intrade.com offered a “U.S. Depression in 2009” contract for trading. The contract pays $100 if the U.S. falls into depression. Depression is defined as total decline in real GDP from Q3 2008 to Q2 2009 of 10%. Currently, the contract is trading at $10. Though volume is low, this indicates the probability of a depression (as defined by Intrade) is small.

I believe our current situation is far more secure than the Depression. For example, during the depression, about 9,000 banks failed. The deposit base of the failed institutions was about 12.5% of 1933 GDP. The equivalent number today would be $1.7 trillion.

I don’t think we are headed for -27% real growth nor do I think we are headed to -10% real growth. However, I do think that a deep recession is possible with a cumulative growth of -5%. The economy will begin to get back on track in either late 2009 or, more likely, early 2010.