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Ludwig von Mises and the Austrian school that slumps come from overinvestment enabled by overlending. In 19281, a year before the crash, Mises wrote: Sooner or later, the crisis must inevitably break out as the result of change in the conduct of the banks. The later the crack-up comes, the longer the period in which the calculation of the entrepreneurs is misguided by the issue of additional fiduciary media2. The greater this additional quantity of fiduciary money, the more factors of production have been firmly committed in the form of investments which appeared profitable only because of the artificially reduced interest rate and which prove to be unprofitable... Great losses are sustained as a result of misdirected capital investments. Many new structures remain unfinished. Others, already completed, close down operations. Still others are carried on because, after writing off losses which represent a waste of capital, operation of the existing structure pays at least something. Here Mises, writing in 1928, describes the crash of 2008 even more vividly than the one in 1929. “Many new structures remain unfinished. Others, already completed, close down operations.” These were mostly plant and office buildings in 1929, and mostly houses in 2008. Mises argued that money should be backed by precious metals. He was right in thinking that it should be backed. But precious metals pay no return. The omnibus fund earns competitive return at the risk level chosen in each account. Accounts are owned for performance, and only incidentally for liquidity. No amount is so large as to tempt overspending. It did not occur to Mises that divorcement of deposits from lending might prevent the cycle in the first place. Nor did he mention the danger of 10:1 bank leverage, and often more, in amplifying consequences of bad guesses. His idea was better governance of commercial banks. Mine is ending them. Free growth theory also belongs to macroeconomics in that it predicts only at the collective scale. It predicts that ex ante net investment, or attempted investment 1 Monetary Stabilization and Cyclical Policy. 2 Unbacked paper money. Also called government fiat money. Chapter 8 Banks, Money and Macroeconomics 2/8/16 13 HOUSE_OVERSIGHT_011102