The credit crunch is so serious that it may force the US banking system to cut lending by as much as $4,000 billion (£2,000 billion), prompting a “substantial recession” in the US, according to stark new research by Goldman Sachs.

Jan Hatzius, chief US economist at Goldman Sachs, has calculated that banks, brokerages and hedge funds could lose as much as $400 billion on sub-prime mortgage-related investments by the time the dust settles from the surge in defaults on high-risk home loans in America.

By Mr Hatzius’s estimation, every dollar in losses reduces the ability of highly leveraged Wall Street institutions to lend by $10, as they typically aim for a so-called capital ratio of 10 per cent.

“If leveraged investors see $200 billion of the $400 billion aggregate credit loss, they might need to scale back their lending by $2 trillion,” Mr Hatzius said.

Mr Hatzius’s actual prediction of a $400 billion write-off would reduce lending by $4,000 billion.

“The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognised. It is easy to see how such a shock could produce a substantial recession,” Mr Hatzius said.

“While the uncertainty is huge, the associated downward pressure on lending raises the risk of significant weakness in economic activity.”

If accurate, Goldman’s forecast predicts further damage for an economy that is already reeling under the weight of record oil prices and the worst housing slump since the Great Depression.

In addition to making it much harder to secure a mortgage, such a dramatic decline in lending would hamper the ability of consumers to borrow money to finance purchases such as cars and washing machines.

Since two-thirds of the US economy is driven by consumer spending, this will hit retailers and other companies particularly hard. Businesses will also be deterred from borrowing money to invest and will be less able to stave off looming redundancies, putting further pressure on the US economy.

Goldman’s prediction comes after Wall Street firms such as Citigroup, Merrill Lynch and Morgan Stanley have collectively reported more than $50 billion in losses on investments related to sub-prime mortgages.

It follows the US Federal Reserve’s second cash infusion of the month on Thursday, when it injected $47.25 billion into the financial system, the largest since the terrorist attacks of September 11, 2001 .

The latest injection was administered two weeks after the Fed injected $41 billion, as the fallout from the housing crisis gathered momentum.

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