NEW YORK: Goldman Sachs economists expect a total of $500 billion in residential mortgage credit losses, a renewed slowdown in economic activity after the near-term boost from fiscal stimulus, and no monetary policy tightening in 2008 or 2009, according to a research note from the firm.

Despite a setback in recent days, many financial market indicators have recovered substantially since the Bear Stearns/JPMorgan Chase & Co deal in mid-March, Goldman Sachs chief US economist Jan Hatzius said.

Still, “we think that overall mortgage credit losses will end up being larger than generally believed,” Hatzius said.

“Excess supply in the housing market is still growing; home prices are already falling at rates that are very rapid by the standards of previous housing downturns around the world; and U.S. loan-to-value ratios are much higher than in those previous downturns,” he said.

“Ultimately, a painful adjustment needs to take place, certainly in the housing and credit markets and likely in the broader economy as well,” Hatzius said.

Even if the shock is moderate, it can have large multiplier effects if it reduces the equity capital of highly leveraged financial institutions that mark their balance sheets to market, he said.