Not true -- we need all the talent we can get. If someone that's good gets rejected, we'll contact them in a few months and hopefully not mess it up again. Mistakes are made in the interview process, but hopefully they aren't unforgivable.
After the last time I was interviewed (unsuccessfully - in 2007) by G I feel I have been blacklisted by them
Apparently there's a period before you can apply again (can't remember how long this is, 1 year maybe) but then again feeling like every contact you make goes to /dev/null is not nice.
Thankfully I know better today about what's it like to work at Google and probably won't be applying again (not that I find it bad, but it is not what I want).
I have had many failed interview cycles at G over the years, but sourcers kept reaching out every year. They used to be awful at maintaining relationships (contractors disappearing and ending the cycle without notifying anyone), but they are more organized and recruiting staffed up to match the workload recently.
I'm not a recruiter and have, in fact, interviewed a total of zero people at Google. But I'm betting we don't call people and say "you are not smart enough to work at Google". If anything, that's a bit too honest for a large corporation, don't you think :)
But seriously, interviews are very very subjective and interviewers have very wide latitude to ask anything they want. Individual interviewers pick the questions they'll ask, and everyone has their favorites. I have a friend that has a phone interview question that I probably couldn't answer correctly with an hour and a whiteboard: I just don't get it. So if I got a few more interviewers like that when I applied, I would not be working for Google, even though I'm theoretically "smart enough to work at Google".
Furthermore, you may be really smart, but that may not come out in the interview. If your interviewer asks you "what's two plus two" and you answer "four" and the rest of the interview consists of you making a latte, the interviewer may write "My candidate knocked the question out of the park. I asked him what two plus two was and he got the answer instantly. And then he made me a cup of coffee! Must hire!" When the hiring committee reads this, though, they might not reach the same conclusion: "It's great that he got an easy question and can make coffee, but is that really what we want?" In that case, you didn't mess up the interview at all: Google did.
So anyway, one should not be disheartened if they "fail" a Google interview. Hiring is a fine art and we are constantly learning. Please re-apply if you are interested in the work we do, and always give feedback to your recruiter. It's OK to call your recruiter after the interview and say "I was being hired to work on TCP optimization and they asked me questions about Java dependency injection frameworks, even though I said I've never used Java."
Many people who switch jobs aren't specifically looking (didn't Joel say the best candidates never are...?), but could easily be tempted by a good offer / company.