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.

  1. Greater Fool Theory

    The greater fool theory states that you can make money by buying ...
  2. Hot Money

    Hot money is money that flows regularly between financial markets ...
  3. Pushing On A String

    Pushing on a string is a metaphor for the limits of monetary ...
  4. Hot Hand

    The hot hand is the notion that because one has had a string ...
  5. Produced Water

    Produced water is waste water generated during the production ...
  6. Water Rights

    Water rights pertain to the legal rights of property owners to ...
Related Articles
  1. Insights

    Free Market Maven: Milton Friedman

    As proponent of free market capitalism, this economist changed the way the world's economies operate.
  2. Investing

    Risks to Consider When Investing in Water

    Investing in water should be a lock. But water is volatile and could see as many risks as potential rewards.
  3. Insights

    7 Misconceptions About The Federal Reserve

    There are many fallacies about the Fed. The following misconceptions are among the most popular.
  4. Insights

    The Federal Reserve

    As an investor, it's important to understand exactly what the Fed does and how it influences the economy.
  5. Trading

    Why Having a Strong Currency Is Like Holding a Hot Potato

    Strong currencies can create complicated situations for nations and policymakers, especially when central banks use divergent and robust monetary easing.
  6. Investing

    5 Water Stocks To Tap Into

    An increase in population and pollution has made water a fragile resource.
  7. Insights

    The Legacy Of Ben Bernanke

    Will Bernanke go down in history as one of the greatest-ever chairpersons of the Fed, or is his legacy likely to be tarnished by events after his departure from the position, as was the case ...
  8. Insights

    What is Fiscal Policy?

    Fiscal Policy how governments adjust taxes and spending to moderate the economy. Fiscal Policy is the sister strategy to monetary policy, through which a central bank influences a nation's money ...
  1. What can policymakers do to decrease cyclical unemployment?

    Learn about the tools available to policymakers to reduce cyclical unemployment, and find out more about the role of expansionary ... Read Answer >>
  2. What are some examples of expansionary monetary policy?

    Learn about expansionary monetary policy and how central banks use discount rates, reserve ratios and purchases of securities ... Read Answer >>
  3. Notional value versus market value

    Learn about notional and market value, how to calculate the notional value of a futures contract and understand the difference ... Read Answer >>
Trading Center