What Is a Fool in the Shower?

"Fool in the shower" is a metaphor attributed to Nobel laureate Milton Friedman, who likened a central bank that acted too forcefully to a fool in the shower. The notion is 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 澳洲幸运5官方开奖结果体彩网:Federal Reserve, acts to sti🎉mulate or slow down an econom𓃲y. 

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 澳洲幸运5官方开奖结果体彩网:fiscal policies too far a♓nd too fast, without waiting to gauge the impact of their initial actions. When the fool realizes that the water is too cold, they turn on the hot water. However, t💜he hot water takes a while to arrive, so the fool simply turns the hot water up all the way, eventually scalding themself.

Understanding a 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. In economic terms, Friedman described this bꦰy saying that there are long and variable lags between changes in monetary policy and changes in the economy.

The time between when a change in monetary policy is executed and changes in economic performance can be observed can be months or years, and the interval is not constant but can and does change over time. A move like lowering the fed funds ꦐrate can take anywhere from six months to two years to fully integrate into the economy and trick🅰le down to changes in lending, investment, real output, and ultimately consumer prices.

Reasons for Monetary Policy Lag Time

These gaps happen because outside of idealized economic models, money is not 澳洲幸运5官方开奖结果体彩网:neutral to the economy, and changes in the supply of money do not enter the economy uniformly distributed but at specific point🥂s and into the hands of specific market participants.

Therefore, changes in monetary policy play out through a series of events and transactions in the economy, spreading out from the point of entry (as new 澳洲幸运5官方开奖结果体彩网:bank reserves usually), and impacting 澳洲幸运5官方开奖结果体彩网:interest rates, prices, investment, and production as 𒈔the new money changes hands in a ripple effect 🐓outward.

The point of where the new money enters the economy and the exact process by wဣhich it spreads through the economy is not fixed, but contingent on the specifics of mo𝄹netary policy: who receives the new money first and in successive transactions, and general market conditions throughout the period of time that it takes to work through the economy. 

For monetary policymakers, this poses a special problem if they are interested in achieving their publicly stated goals of stabilizing economic metrics such as unemployment and consumer 澳洲幸运5官方开奖结果体彩网:inflation. They cannot observe the effects of any given change in monetary policy until some indefinite point in♋ the future, and can’t be sure how long that wi✨ll be.

Combined with the pressure to act to fix immediate problems 🍨in financial markets, this can lead a monetary policymaker to “overcorrect” monetary policy and create long term problems in reaction to short term demands. In light of this, many economists are often cautious about overreaching and prefer small consistent steps to enact change.

Monetary Policy and the Fool in the Shower M♔etaphor

Friedman created the metaphor of the "fool in the shower" who is constantly tinkering with the hot and cold controls because they do not realize that there is a lag between the time they order 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. However, Freidman believed, as have most other 澳洲幸运5官方开奖结果体彩网:Monetarists, such as Fed Chairmen 澳洲幸运5官方开奖结果体彩网:Alan Greenspan and 澳洲幸运5官方开奖结果体彩网:Ben Bernanke, that these lags can be approximated and accounted for by wise policymakers by making incremental changes in policy and tracking market conditions to model their e🌜ffect🍨s.  

However, given some of the extreme economic events, and monetary policy reaction to them, over the past few decades this may be more of a challenge than some believe. In an economy prone to 澳洲幸运5官方开奖结果体彩网:financial crises, constant 澳洲幸运5官方开奖结果体彩网:evolution of technology and economic r🎃e🅰lations, and subject to radical new 澳洲幸运5官方开奖结果体彩网:nonstandard monetary policies, perhapsꦕ the impact of a fool in the shower wi꧒ll always be a lingering element to markets dominated as they are by central banks.