The US is already moving towards de facto nationalization of the banks, as loans by the Fed (and foreign governments) become the primary source of new capital. The large scale government interventions advocated by several of the leading Presidential candidates (e.g. Clinton) indicate what we can expect if conditions continue to deteriorate.

A recession - especially if long and deep – will accelerate deterioration of both households and businesses, forcing this nationalization process to continue. The “Japan solution” is the course of least political resistance: prop up the banks with lightly hidden government help and wait for natural forces to “heal” the economy over time.

There are many ways to socialize the debt. The government (via the Fed or the Treasury) could expand its loans to banks in both size and duration, similar to what Japan did when they re-capitalized their banks with convertible preferred stock. Or government-sponsored mortgage agencies could be the hidden hand providing support. Either way, the mechanics are conceptually simple. For example, a government program could allow you to exchange your existing mortgage for a 30-year, low interest, fixed rate mortgage (non-refinancable, with recourse, principle and interest ”government guaranteed” to the creditor). Done well this might require small cash outlays (hence minimal adverse fiscal impact), but would have severe impact on the government’s balance sheet (although few care about such things, yet).

This would require strong legislative action of dubious constitutionality. Neither is unprecedented in American history; both are commonplace in the past fifty years.