Sorry, haven't logged in in a while.

I'm only an econ undergrad, so I'm not a drop-dead expert in economics. However, I work as a business valuator by day, so I like to think I know a thing or two about evaluating the profitability of projects.

There's a lot of Rothbardian baggage about money I associate with the theory. That may or may not be a separate conversation. Don't even bother trying to argue against my points here if you believe fractional reserve banking is bad, because we don't agree on enough to have a productive conversation about this issue. We should instead focus on money and FRB first.

The ABCT story is about excessively low interest rates causing firms to be too farsighted in their planning. If rates increase, then projects that were profitable are no longer profitable, and the economy contracts.

Here's a few reasons why I don't like this story:

• It requires a massive level of incompetence from entrepreneurs. Arguably the most popular business valuation resource for estimating costs of capital, Duff and Phelps, has a report on adjusting risk free rates for the expected future path. If businesses are unstable because they are not robust to 5% swings in interest rates, then they will likely be unstable due to other shocks as well. ABCT requires them to fall for the same trap over and over again.
• It's drastically asymmetric. ABCT only focuses on distortions caused by too much money being printed. What about the distortions caused by too little money being printed? Modern cases show this is far more damaging. The transmission mechanism isn't based on interest rates, but it still matters a lot.
• The case for expansionary policy causing bubbles is not as strong as many think. NGDP growth during the worst of the housing bubble was only 5%. That's below average growth over the past few decades, which were a remarkably stable time. Yes, interest rates were low, but that had more to do with an influx of foreign savers than Fed policy. (Aside: Interest rates are a bad indicator of monetary policy. High interest rates during German hyperinflation is a great example.)
• As far as the late 90's go, yes, lots of bad investments were made. I think this was caused not by bad monetary economics but by irrational investor beliefs. I imagine people would still have invested in Pets.com regardless of Fed action or inaction. Monetary policy might explain excessive valuations everywhere, but it doesn't explain excessive, localized valuations. Additionally, interest rates are mostly irrelevant to the tech sector where financing is usually based on equity rather than debt.
• If the ABCT policy is true, we'd expect to see a bust in long-term schemes during recessions and a boom in short-term schemes. Instead, we see a bust in both.
• ABCT seems married to the idea that expansionary monetary policy is "unsustainable" and interest rates must return to "natural" levels. This is nonsense. The Fed has been performing QE for years, and it's been tremendously helpful by most accounts. Fed "inaction" is still action.
• There's not much empirical support for the theory.

Edit: Broken link.