I have considered the possibilities expressed so far, but I have also thought of another explanation: it is simply a "mistake" made by Tolkien. By "mistake" I mean I believe he wrote
The Hobbit independently and the rest of
LotR and
The Silmariliion followed from its success, and he tied it all together. I believe at the time he wrote
The Hobbit that he had not considered to the extent he later did the origins of wizards. He may have thought they were merely old, wise men with magical arts and abilities. Therefore, he and Radagast easily could have been cousins in the literal, physical sense of the word with grandparents as the common ancestors when he first wrote that they were cousins.
Merry:
