TERM OF THE DAY - MAY 5TH, 2008

Fool In The Shower

What Does it Mean?
A phrase used to describe the idea that changes or policies designed to alter the course of the economy should be done slowly, rather than all at once. It describes a scenario where a central bank, such as the Federal Reserve acts to stimulate or slow down an economy. When the first stimulus is made, the effect may not be immediate, which can cause decision makers to increase the magnitude of the change, eventually causing too much stimulus.

Investopedia Says...
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.

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.

NoeL