The main point is that the Federal Reserve is not contained within any branch of the United States Government. It is a consortium of private banks that was given a monopoly of creating the money supply of the country. Its accountability to Congress is nonexistent, although the Fed does grant periodic hearings to the banking commissions. Congress, though, has ignored its responsibility to regulate the Fed, and no independent complete audit has been performed.
Thus, giving the Federal Reserve even more power is giving up the power of the government to regulate the markets to a private central bank that is completely unaccountable. It is debatable whether or not the government should be regulating the free market, as this helps create malinvestment and thousands of pages of regulations often turn into thousands of pages of loopholes. But the Congress should not allow a private bank to regulate the market and shield this bank from any oversight or scrutiny.
The Federal Reserve, along with other agencies of the government such as the Office of the Comptroller of the Currency (OCC) and Department of Housing and Urban Development (HUD), was integral in creating the real estate bubble. They were also involved in the profit-taking that the bubble created, and are now involved in bailing out the nation's largest banks from the fallout of the crash. Colluding government agencies working together to create the foreclosure crisis deserve to be abolished, and their functions returned to the market -- not given even more power to inflate themselves into a new bubble.
Whether the Paulson plan goes far enough to address the inadequacies of regulation of the banking and mortgage markets is nearly an irrelevant debate. The question of the effects of the"Federal Reservation" of the markets is not being asked. Do we really want the government to give up even more of its oversight and regulatory responsibilities to a private system of banks owned by the very banks that assisted, along with other too-powerful government agencies, in creating the conditions that have led to so many homeowners facing foreclosure?