Ben Bernanke is being interviewed by congress right now, and just said this in a defense of the Fed in terms of long-term economic growth. He said, and I quote:
"Monetary policy can't do much about long-term growth."
This is frustrating it's so wrong. Monetary policy is absurdly important to long-term growth and long-term growth obstacles. The short-term focus of monetary populists is disconcerting to say the least.
It's absolutely vital to understand that interest rates are part of the price of credit. This means that manipulated interest rates are just like manipulated prices in general.
To understand what manipulated interest rates do to long-term economic growth, we have to first understand the role prices play in the economy. Prices are essentially the writing on the wall from the invisible hand.
Prices tell us what the supply and demand of material production and consumption are. When prices are manipulated, it means that buyers and sellers will be buying and selling in a way not based on natural market supply and demand. This greatly, greatly manipulates the market.
The malinvestment created by manipulated interest rates is unavoidable. For example, if the price of building cars was "free" because of government subsidies, we would instantly see production of cars go flying through the roof.
But this wouldn't be free. This would be at a cost of other parts of the economy, and the negative impacts would be outrageously destructive.
For a real-world example of how manipulated interest rates can create bad signals and malinvestment, just look at the recent housing crisis and crash. That we are essentially ignoring the very real macroeconomic lessons of the mortgage bubble and crash is horrifying, because we're now doing exactly what led to the crisis in the first place.
Ben Bernanke is wrong. He's dead wrong. Monetary policy is incredibly destructive to long-term growth, and any investor who isn't actively looking for manipulated-interest rate malinvestment will just be hit extra hard when the crisis comes.
Learn from history or repeat it. There's no other option.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.