BERNANKE FACES CONSEQUENCES OF INFLATION TIME BOMB

       When the financial system was teetering, Federal Reserve Chairman Ben Bernanke flooded it with trillions of dollars to save the banks and free up credit for consumers and businesses.
       Looming in the future is a highrisk challenge for the economy's rescuer-in-chief: he will have to mop up that money without disrupting a nascet recovery.
       Bernanke spoke yesterday at an annual Fed conference in Jackson Hole, Wyoming, looking back over the past year of the financial crisis, recalling the lessons learned.
       When, precisely, to pull back the money is an issue sure to surface as Bernanke, his counterparts in other countries, academics and economists meet over the next couple of days at the conference.
       Timing is vital. Act too fast, and Bernanke risks choking off lending to businesses and everyday Americans. Wait too long, and he risks setting off crippling inflation.
       "We are in such an unusual situation," said Lyle Gramley, a Fed member in the early 1980s and now chief economic strategist at Soleil Securities Corp. "The Fed will have a more difficult set of decisions to make."
       Assuming he manages to help usher in a sustained recovery, Bernanke, like his predecessors, will eventually face still another challenge: he will be under enormous pressure to keep interest rates low, even though that could speed inflation.
       But the Fed chief will face no task quite as perilous as withdrawing the trillions the Fed has pumped into the financial system in ways that had never been envisioned.
       That money helped prop up shaky banks. It also was intened to unlock lending to people and companies, a key component of any recovery but one thatg so far has had only spotty success.
       Some analyst think it could take four or five years for the Fed to withdraw the money entirely and shrink a balance sheet that is now about US$2 trillion (Bt68 trillion), more than double what it was when the financial crisis struck.
       Already, the Fed has taken baby steps.
       It has said it will allow one programme intended to support money market mutual funds - one that has not even been used - to expire on Octover 30. It has also reduced the maximum it will lend to banks under two other programmes.
       Earlier this month, the central banks signalled it would not extend past Octobekr a $300-billion government debt-buying programme. That programme is intended to llower consumer and corporate loan rates.
       But this week the Fed extended a separate programme designed to increase lending and help the commercial real-estate market. So far, about $40 billion in loans has been extended to investors - a small fraction of the $200-billion made available in the programme's first phase. And Americans still have trouble getting loans.
       The biggest decisions lie ahead.
       One will be deciding when and how to unload $1.25 trillion in Fannie Mae and Freddie Mac Mortgage-backed securities without sending mortgage rates surging. Another delicate matter is when the Fed should start selling some of its $300 billion in Treasury debt.
       In fighting the recession and financial crisis, Bernanke unleashed some of the most aggressive actions in the history of the central bank, which was created in 1913 after a series of bank panics.
       He slashed interest rates to record lows near zero. He provided low-cost loans for banks and bought debt so companies would have short-term "commercial paper" loans available to pay for salaries and supplies.
       The Fed also bought mortgage-backed securities and government bonds to drive down interest rates on mortgages and other consumer debt. Bernanke also moved to support the mutual fund industry.
       Congress, the White House and statehouses across America will probably exert intense pressue on the Fed to keep the money flowing and the emergency aid programmes operating.
       "There's no question the Fed has the capacity to reel in the stimulus. It is the politics that trouble me," says Allan Meltzer, a professor at Carnegie-Mellon University and author of a history of the Fed.
       Keeping the easy money in place too long could feed high inflation by encouraging over-borrowing and overspending. Surging inflation could then derail a recovery if it caused the Fed to agressively boost interest rates.