Under normal circumstances a healthy bank should easily be able to handle a very large increase in unemployment, and foreclosures wouldn't be that impacted by modest increases in unemployment ...

The current circumstances can hardly be called normal being that a record number of people are underwater on their mortgages, we have record levels of consumer debt and record low savings; and many of these people will be unable to make payments on their loans immediately after losing their job, and within months will be defaulting on most of the loans and will need to enter bankruptcy. To make matters worse the banks are not healthy and were facing collapse a matter of months ago, and any evidence that the financial sector was in trouble (any of the big banks facing failure) would result in a run on all major banks and could (potentially) push them all over the edge.

The bailout of the banks did not resolve anything, it just bought time for liquidity to recover so that the banks were not at immediate risk of failure; and if any of the big banks are pushed hard enough they will fail. The best analogy I can think of is that the banks are a 500 pound man who had a heart attack and the government put forward $1,000,000 to stabilize his condition ... Without surgery he will probably die, without a major lifestyle change he will probably die, and any minor illness or excitement will probably kill him.

I am fully aware of the stress tests, but I have yet to see any evidence that the large banks are suffering any greater with unemployment nearing 10%. Yes it could be that when unemployment hits a higher level we could see greater fallout, but for the moment the evidence supports that the larger banks are stabilized.

Did I say there was no debt NJ5, no, I just said that consumers aren't feeling it as badly as your OP source believes it to be, sure they have pulled back, but if it was really that bad, we'd have seen much greater pullbacks on everything but the bare essentials, instead we see people being smarter shoppers.

The reason I believe that the economy will be in recovery by next year is the economic indicators, seem to indicate that while we are in a recession still, we are nearing the bottom.

In what way do the economic indicators demonstrate that we are near the bottom?

When you're dealing with a very bad recession or a depression the economy seems to stabilize for weeks or months (and in this period there can be strong rallies in the markets) until something happens; at which point a new wave of economic trouble begins, market sentiment changes, and everyone realizes that the economy will not be rosie in a couple of months.

The only way you can tell the difference between the bottoming of the economy and a plateau before a fall is by looking at whether they underlying problems have been resolved ... The whole point made by the OP in this thread was that the underlying issues have been ignored.

Leading indicators indicate that we are near the bottom, laeding indicators are composite indicators which are used to forecast future economic performance, in addition we are seeing that consumer confidence, Manufacturing and retail sales, while still not doing well are off their lows.

Yes that can happen, but you're going to have to show that things are going to get worse, that this is a false bottom, and just saying at the unemployment will rise a few percentage points, doesn't do it, unemployment always rises during a recession, heck it even keeps rising for a few months after a recession is over.

See I don't believe that the underlying issues hae been ignored, I believe that he is overexagerrating what the underlying issues are, see while debt is a concern, the retraction hasn't been severe enough to indicate that things are going to get a lot worse, most people are managing their debt well. Yet people are still spending and investing, their just being more cautious, saving a bit more and looking for better deals, using their credit cards less, and banks are being a bit more wise in how they hand out loans and credit, but we haven't seen the retraction needed to really send the economy into a tailspin.

At this point it'll have to be something big and unexpected, that really shakes the economy at its foundation to really send things plummeting.

Interesting thread indeed! I just scimmed thru the OP quickly and will dwelve deeper into it later, but need clarficcation on just one phrase thats unfamiliar to me:

What meaning has the word 'default' in this context?
(as in "allow excessive debt to be defaulted")

Government introduction of the debt through socialist efforts like fannie and freddie were the problem. Goverment cannot be the solution.

Defaulted means to just not pay the loan, and not to be obligated to ever play the loan.

So if a bank has 10 billion in debt, and the bank folds, the people that banked owed the money to just loses any option to get that money. It's just gone.

This would mean many banks would be folding (or filing chapter 11, having there debt wiped, and continuing), and it would cause some pain, but it's pain we need to go though before we are out of this.

What government is doing, is not letting those banks fail, and prolonging the problem. 

No fannie and freddie were not the cause of this, the real causes were excessively low interest rates, lax regulations, and really easy credit,which was only made worse by banks wanting to take advantage of the housing market and making it even easier for people to obtain money, as well as the classic overleveraging and speculation, government wasn't the main driver of this, except maybe the fed, which under greenspan especially, kept interest rates really low too long

From "History of the American Economy" 10 edition Hugh Rockoff & Gary Walton P.458 from the chapter on "The Great Depression":

The Federal reserve at this point, Most Economic historians agree, should have acted as  a Lender of Last resort.  It should have lent generously to the Bank of United Staes and other failing banks to break the cycle of fear that was undermining the banking system.  for a variety of reasons that we will discuss later in detail, however it did not do so.  To the Federal reserve it seemed that the banks that were failing were simply badly managed banks that should be eliminated to make the system more efficient.

They already tried your idea once Mafoo, it ddn't work then.