DEFINITION of 'Fool In The Shower'

Fool in the shower is the notion that changes or policies designed to alter the course of the economy should be done slowly, rather than all at once. This phrase describes a scenario where a central bank, such as the Federal Reserve acts to stimulate or slow down an economy. The phrase is attributed to Nobel laureate Milton Friedman, who likened a central bank that acted too forcefully to a fool in the shower. When the fool realizes that the water is too cold, he turns on the hot water. However, the hot water takes a while to arrive, so the fool simply turns the hot water up all the way, eventually scalding himself.

The expression is best summed up as the scenario when central banks or governments overreact to swings in the economic cycle and loosen monetary and fiscal policies too far and too fast, without waiting to gauge the impact of their initial actions.

BREAKING DOWN 'Fool In The Shower'

Any change made to stimulate a broad economy, especially one as large as the U.S. takes time to work its way through. A move like lowering the fed funds rate takes about six months to fully integrate into the economy. Therefore, economists are always cautious about overreaching and prefer small consistent steps to enact change.

Friedman created the metaphor of the "fool in the shower" who is constantly tinkering with the hot and cold controls because he doesn't realize that there is a lag between the time he orders up a temperature change and when such a change occurs. Applied to the economy, the metaphor suggests that policymakers are prone to overshooting their target and making things worse rather than better.

Perhaps the notion of a fool in the shower will always be a lingering element to markets. At times, particularly during periods of financial distress, economic and public policymakers overreact and misread economic and business warning signs. For instance, in late 2007, financial market prognosticators wondered if U.S. Federal Reserve chairman Ben Bernanke was acting like the showering fool by cutting interest rates aggressively in response to the developing credit crunch. Rationales often pointed to the Fed not doing enough during the Great Depression.

RELATED TERMS
  1. Response Lag

    Response lag is the time it takes for corrective monetary and ...
  2. Policy Mix

    The combination of fiscal and monetary policy a nation's policymakers ...
  3. Central Bank

    The entity responsible for overseeing the monetary system for ...
  4. Ben Bernanke

    Ben Bernanke was the chairman of the board of governors of the ...
  5. Recognition Lag

    Recognition lag is the time lag between when an actual economic ...
  6. Centrally Planned Economy

    A centrally planned economy is an economic system in which decisions ...
Related Articles
  1. Investing

    Who's The Better Financial New Source: The Motley Fool or Seeking Alpha

    This is a comparison of two of the most popular investment research sites: The Motley Fool and Seeking Alpha.
  2. Managing Wealth

    Best Airline for First Class: Emirates vs. Etihad vs. Qatar

    These airlines are known for their luxurious first-class offerings. Here are the luscious details.
  3. Investing

    WaterSense: Saving Water And Money

    With a few simple updates, you could be saving on your annual water expenses.
  4. Insights

    Stagflation, 1970s Style

    Find out how Milton Friedman's monetarist theory helped bring the U.S. out of the economic doldrums.
  5. Insights

    A Look at Fiscal and Monetary Policy

    Learn more about which policy is better for the economy, monetary policy or fiscal policy. Find out which side of the fence you're on.
  6. Investing

    Water-Related Investments Are Making A Splash

    There’s no doubt about it. The world is facing a water crisis. However, for forward thinking investors, that could mean a huge opportunity.
  7. Investing

    How The Federal Reserve Fights Recession

    Discover the steps that the Federal Reserve has taken to help save the economy.
  8. Insights

    7 Misconceptions About The Federal Reserve

    There are many fallacies about the Fed. The following misconceptions are among the most popular.
  9. Personal Finance

    Cheap Steps To Reduce Your Carbon Footprint

    Making small adjustments to your habits and lifestyle can have big payoffs.
  10. Insights

    How Much Influence Does The Fed Have?

    Find out how current financial policies may affect your portfolio's future returns.
RELATED FAQS
  1. What Is 'Hot Money?'

    Learn how investors are attracted to "hot money" where funds are actively seeking short-term returns, often in high-interest ... Read Answer >>
  2. What's the difference between monetary policy and fiscal policy?

    Discover the distinctions between these two tools designed to influence national economies. Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center