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.

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