One of the world's leading economists predicted yesterday that Washington's proposed $700 billion (£382 billion) bailout of the banks would “open a can of worms” as other distressed American industries sought a similar rescue deal.

Speaking to The Times, Kenneth Rogoff, former chief economist at the International Monetary Fund and now Professor of Economics at Harvard University, also said that the United States was “certainly looking at a deeper recession than we were three months ago because the financial system has continued to implode”.

He predicted: “We are now going to get other sectors asking to get bailed out, such as the automotive industry. The credit problems are radiating across the US economy, seeping into autos, student loans and commercial real estate. Who else is Washington going to prop up?

“It is hard to see that this is even half over.”

His comments came as Henry Paulson, the US Treasury Secretary, met lawmakers from the Republican and Democratic parties to persuade them to hurry through the biggest financial intervention in America since the Great Depression.

The bail-out plan had been drawn up by Mr Paulson and Treasury officials over the past few weeks, but had been kept secret for fear that Congress would have time to publicly oppose such a deal.

On Friday, Mr Paulson and President Bush outlined the plan, in which the much more powerful Treasury Department would establish a federal-backed fund to acquire mortgage-backed bonds from troubled banks. The scheme is to be funded by the US taxpayer.

Mr Paulson said that the long-term consequences would be dire for the US economy and for the country as a whole should the deal not be approved, triggering a financial meltdown and long-term loss of jobs.

Professor Rogoff said that he had adjusted his forecast for the US economy and that he now believed that the weakening of the American financial system over the past three months would hit economic growth. There was, he said, a risk of a two-year recession.

“Two-year recessions are quite exceptional,” Professor Rogoff said. “You only see it with economies which are in desperate need of restructuring. That could happen to the US. I had thought we would be at zero growth until 2009 then gradually move up to 1 per cent, or to 1.5 per cent. This is going to knock something off growth.”

The American economy is already feeling significant strain. Unemployment is rising alarmingly, with about 450,000 Americans losing their jobs every week, and more than 6 per cent of the workforce out of work.

While job losses have spread beyond the financial sector, hitting the car, retail and construction industries, Professor Rogoff said that America's financial sector would undergo “epic consolidation ... Financial services is now a distressed sector. Around 30 per cent of corporate profits in the US come from it and 10per cent of wages. That is not sustainable. There will be fewer firms and fewer people working in it from now on.”

Mr Paulson, appearing on television talkshows yesterday, pressed home the threat to the economy should his bailout plans not be approved by Congress next week. The former chief executive of Goldman Sachs said that while his proposals needed urgent approval - he is hoping that a vote will take place on Wednesday and that the measures will become law this month - the $700 billion bailout offered no quick fix.

Wall Street experts have sought to ascertain the long-term conseqences for the financial community in the US. In return for the bailout, both Mr Paulson and Democrats have expressed the need for an overhaul of financial regulation to prevent a similar catastrophe in the future. This is broadly perceived as Washington seeking to clamp down on the amount of borrowing that banks are allowed to build up.

One hedge fund manager said: “You can't bring the world to the brink of collapse and then just carry on as before. They [the regulators] are going to hammer us from here on in, cutting down on short-selling and leverage. By giving this hand out to the banks, the Government will feel that they can be as tightly regulated as they want them to be. Wall Street will go back 25 years because of this.”

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