L. William Seidman, who was head of the FDIC and Resolution Trust Corp. during the S&L crisis, died Wednesday. Here is one of the last things he wrote, for Bank Director magazine (free registration required), pondering the implications of Fed Chairman Bernanke's extraordinary Wall Street bailout. As someone who presided over a successful bailout, he knew that saving and/or dispatching ailing lenders is only the beginning of the process.

But what about the possibility of a major inflationary bubble caused by all the money (credit) created to carry out these intervention policies? The chairman has repeatedly said that most of the new credit is short term and can be reduced quickly if need be to diminish the inflationary threat. He may be right, but that depends on the Fed's willingness to withdraw its support-not a popular decision. Furthermore, inflation does not depend only on the Fed. The U.S. government is running a trillion-dollar deficit, which is clearly inflationary in the long run.

While Fed action is important, the greatest threat of inflation comes from the failure of the government to get the deficit under control in the near term. It's much easier politically to push a stimulus program (a shot of dope) than it is to cut government spending. When the system needs to cut expenditures to avoid inflation (detox), the many who have been enjoying the benefit of government largess will fight very hard to slow reducing expenditures.