Warsh was a senior White House official under President Bush, and he had a hand in the supply-side tax cuts on investment that were enacted in 2003. But it sounds like he learned a lot about the Fed's cheap-money policies at the time. Those policies drove down the dollar for years and resurrected inflation, and they're what killed the incentive effects of the Bush tax cuts and their positive effects on economic growth.
The subsequent housing and commodity bubbles -- including the massive energy shock -- utterly doomed the economy. The Fed took tiny, one-quarter-of-a-point steps over a period of four years in an attempt to reclaim anti-inflation normalcy. But the policy failed dismally. So now Warsh seems to be saying: Let's not make the same mistake again. Let's take strong, large steps to raise the target rate and drain excess cash from the economy.
I'm willing to bet that the rise in gold and commodity prices, along with the drop of the dollar, has Warsh thinking the Fed's tightening time is not far off.
Of course, this same dollar turbulence should be a fulcrum for the G-20 nations. If the U.S. greenback keeps sinking, a monkey wrench will be thrown into the global recovery. Dollar depreciation can export U.S. inflation worldwide, and drive up interest rates at home and abroad, if we force our trading partners to print too much money by buying too many dollars in a futile attempt to absorb dollar-excess.
So instead of bashing banker pay, the G-20 members should undertake a worldwide dollar-rescue-and-stabilization program. That would strike a blow for currency stability everywhere and promote global economic growth.
Alas, I don't see any growth policies coming out of the G-20 nations right now. And with phrases like "peer review" being thrown around, I fear a U.S. exercise in financial and economic multiliteralism. Just as President Obama seems to suggest that American foreign policy will be run through the United Nations, I'm wondering if U.S. economic and financial policies will be passed through the G-20 -- a one-world financial regulator that will handcuff the American system.
At the moment there are no supply-side tax cuts on the table. There's no clear trade liberalization. And there's no focused attention on the currency problem known as the dollar. Brazil and China are talking about a new world reserve currency, which is one reason why gold has been rising. But the dollar dilemma will rein supreme unless the G-20 does something about it.
Kevin Warsh doesn't go this far in his Journal piece, but his attention to financial-market price signals is something all the big-shots in Pittsburgh should be thinking about.