Washington must inject between $50bn and $75bn in tax cuts and other fiscal measures into the US economy in the near future to offset the mounting risks of a full-blown recession, says Lawrence Summers, the former Clinton administration Treasury secretary.

He warns in the FT, and an earlier speech, that without timely action, the average US family could lose up to $5,000 in income, the country could suffer hundreds of thousands more home foreclosures and national debt could significantly increase - “even in a mild recession”.

The Fed’s fear of stoking inflation was outweighing the need to prevent the economy stalling, as it had in the past, he argued: “For most of the postwar period, economic expansions did not die of old age. They were murdered by the Federal Reserve in the name of fighting inflation.” (You can read the full speech here: The state of the US economy: Risks of recession, prospects for policy.)

So is the risk of inflation being overplayed? Is there a significant risk of recession? What should the Fed do? Mr Summers answered a selection of readers’ questions.

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You’ve argued for a fiscal stimulus saying that its benign effects would be felt faster than a monetary stimulus. But what about inflation, which has been rising more recently in US? Wouldn’t that increase it even more by a faster rate? Andre, Brazil

Lawrence Summers: Yes. Inflation is a very important issue and in general more demand means more inflation. As I explain in today’s column, however, there are a number of reasons – principally the impact of low interest rates and commodity prices - for thinking that using fiscal as well as monetary stimulus can help the economy with lower inflation costs. Also it is important to recognise that there is as yet not much evidence of imbedded long term inflation expectations, as distinct from impacts from oil prices and the fall of the dollar. Of course if such evidence became clear it would in a sense be too late.

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The subprime mess was a nasty iceberg; where there’s one iceberg, there are usually more. What other of our wonderful, newly created financial instruments or structures have the potential to create similar damage?
Bobby Schrijver, New York

Lawrence Summers: In general the risks are greatest where there are assets which are hard to understand or priced on a daily basis and traded only infrequently. There are certainly some structured products and fixed income derivatives that fit this description.

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How would the tax cut stimulus be structured? By credits for individuals and incentives for corporate and business investment? Would these be one timers and expire in a two or three year period or made permanent?
J. Allen Kosowsky, US

Lawrence Summers: Tax cuts are the best structure for the very short term, perhaps one-year, and best targeted to individuals who have the greatest need to spend - this means those on lower income and those whose incomes who have fallen.

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Why should the US government do anything whether fiscal or monetary? Economists like yourself have been complaining about global imbalances for the longest time. A recession leading to further depreciation of the USD will address the current a/c deficit. Furthermore, a recession will force US consumers to rebuild savings. This adjustment will mean a healthier global economy. The lesson is that recessions are very good at adjusting imbalances. Asia went through a depression and recovered nicely. So US should take the pain of ’only’ a full blown recession. In the long run it will be healthier.
Robin Yeoh, Singapore

Lawrence Summers: I did not subscribe to the ‘healthy purging’ theory of recession. US wealth income ratios are at historically high levels, reducing the need for urgent rebuilding of savings. It is far from clear to me that anything good will come from unmanaged sharp falls in US asset prices and the dollar starting from where we are now. Moreover, the US has been the importer of last resort for the global economy for some years now and adjustment from this path should be gradual.

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By using tax money to prop up home prices above their rental or income correlated value, wouldn’t politicians be trading short term problems for bigger long term ones at the expense of patient renters who were priced out of the housing market years ago and are hoping for price declines to afford a house?
Daniel Sochor

Lawrence Summers: Propping up home prices is a bad idea. Preventing foreclosures, fire sales and transitory price declines is a good one, drawing the line is a difficult matter of balance. I certainly don’t believe that a systematic approach to prop-up prices would be a good idea at this time.

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Why do we fear a recession? Our leaders tell us the core of the economy is in good shape. I have the utmost confidence that we would bounce back just like we always have. Why take extreme measures?
Mark Bicanic

Lawrence Summers: We fear a recession because of the havoc it would wreak for the lives of millions of families, the reduction in the economy’s long-run production potential that would come from reduced investment, and the damage to the global economy it would result. No doubt eventually, the economy would bounce back, but the self-limiting character of most sickness is not usually taken as an argument against medicine.

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As in Bush’s first term, a cash infusion into American households will likely have a good short-term effect on the economy, but at what point should we be expected to stop running homes and government on a credit card?
Miguel, CA

Lawrence Summers: I agree entirely with the spirit of the question which is why we in the Clinton administration worked so hard to create budget surpluses and began paying down the national debt. The ideal measures at the moment would be carefully designed to lock in long-run debt reduction even as they were providing stimulus in the short-run.

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How is the US going to avoid the Japanese experience in the 90s?
Phillipa Tomlinson, Oxford, UK

Lawrence Summers: I hope and trust that the US can avoid this. But there are no certainties. The best chance is to act boldly on fiscal stimulus repair of the housing sector and monetary and financial policy so as to pre-empt a vicious credit accelerator cycle in which a fallen real economy begets credit problems which in turn begets real economic problems. Ironically bolder action now is the safer course for the US economy.

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Who do you consider to be the most credible and formidable person that takes the opposing point of view on whether taxes need to be cut to rescue the US economy, what is his/her argument and why do you feel your argument is the stronger one?
Steven LoCascio, New Jersey, US

Lawrence Summers: The best arguments against fiscal stimulus are: One, that the economy is not really going to decline for any appreciable length of time. And two, that the fiscal actually delivered would not be timely, targeted and temporary and therefore would prove counter-productive. My sense is that the risks are much more on the down side for the economy and that the political process is capable of getting fiscal stimulus right. But these are the crucial judgments.

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