When the Fed announced plans to allow banks to borrow $20 billion in short-term reserves through an anonymous auction system, it was widely reported that anonymity was important because borrowing reserves carried a stigma. The NYT reported the results of the auction yesterday and repeated the assertion about Fed borrowing carrying a stigma. The only problem is that the results of the auction seem to contradict the assertion. The money was lent at a 4.65 percent interest rate, 0.1 percentage point less than the discount rate. In other words, banks were willing to pay less to borrow money anonymously than they would have been required to pay to borrow the money openly. If there was actually a stigma attached to openly borrowing from the Fed, then we should expect that banks would be willing to pay an interest rate premium to borrow anonymously. This result again raises questions about why the Fed is conducting the auctions this way. The financial system got into its current mess in large part because of a lack of transparency. If some banks are having trouble remaining liquid, why should the public as a whole not have this information. Certainly some insiders have this information, and in U.S. financial markets it is always reasonable to be concerned about creating profit making opportunities for insiders at the expense of outsiders.
--Dean Baker