I hadn't thought about this, but he's right http://blogs.zdnet.com/micro-markets/index.php?p=219

Schmidt is right to say that click fraud doesn't matter much (in the long run) to the advertiser, because they can adjust their bid to match whatever level of business they're getting from the ads. But it's not the whole picture.

Click fraud surely matters to Google, because if the advertisers reduce their bids it's less money being paid to Google.

And click fraud surely matters to any content provider who is not participating in the click fraud, because the reduced ad prices make it harder for them to make an honest living. And that also matters to Google, because it lower ad prices would drive honest content providers away from Google towards higher-paying ad providers.

"Click fraud surely matters to Google, because if the advertisers reduce their bids it's less money being paid to Google."

Not really – advertisers are reducing the amount they pay per click because of click fraud. If there was no click fraud advertisers would be prepared to pay more PER CLICK, but would need less total clicks so Google would get the same amount of money.

"And click fraud surely matters to any content provider who is not participating in the click fraud, because the reduced ad prices make it harder for them to make an honest living. And that also matters to Google, because it lower ad prices would drive honest content providers away from Google towards higher-paying ad providers."
Good point!

When did Schmidt said
"Eventually, the price that the advertiser is willing to pay for the conversion will decline, because the advertiser will realize that these are bad clicks, in other words, the value of the ad declines, so over some amount of time, the system is in-fact, self-correcting. In fact, there is a perfect economic solution which is to let it happen." ?

And why no one noticed that until now? (the article says Schmidt's quote is from March)

Yes Splasho you're right.