No institution ever gives up power willingly. It has to be taken from it by force–not necessarily armed force, but certainly political force. To wit, the battle over the power of the Federal Reserve Board. Two different takes floated around the business/mainstream media today–both of which miss the point, which I’ll get to down below. First, from The New York Times, the angle is:

Two economists with longstanding ties to the Federal Reserve warned Congress on Thursday that it would be a mistake to make the Fed a super-regulator in charge of reining in “systemic risk” and financial institutions considered “too big to fail.”

In what is shaping up as a political battle over a crucial part of President Obama’s plan to overhaul financial regulation, the economists told a House panel that the Fed had consistently failed to recognize financial catastrophes until they were well under way.

   And, as for the Obama Administration’s proposals:

The Fed would also be in charge of regulating giant financial institutions that are considered too big to fail, perhaps by imposing higher capital requirements on them.

But the proposal is highly controversial. Banking and Wall Street executives generally support the idea, as do current and former officials at the Fed and some Democratic lawmakers, like Representative Barney Frank, chairman of the House Financial Services Committee.

Lawmakers are sharply divided. Many Democrats have accused the Fed in recent months of being too secretive and too sympathetic to the banks and financial institutions that it has helped bail out. Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee, is skeptical about giving the Fed more power.

Republicans have been even more hostile, depicting an expansion of the Fed’s charter as an expansion of big government by unelected officials. More than 250 Republicans have co-sponsored a bill by Representative Ron Paul of Texas that would allow the Government Accountability Office, an arm of Congress, to conduct “audits” of Fed decisions on monetary policy.

Fed officials oppose that measure, saying it would threaten the central bank’s independence and cast a chill over policy makers.

   Then, the Financial Times says this:

Donald Kohn, vice-chairman of the Fed, argued at the House financial services subcommittee hearing that any sense of political interference would negatively affect markets.

"Any substantial erosion of the Federal Reserve’s monetary independence likely would lead to higher long-term interest rates as investors begin to fear future inflation," he said.

Not only did Mr Kohn argue that the Fed should be given the power to regulate large systemically significant companies, but he argued against giving up responsibility for consumer protection, asking Congress to overturn the Obama administration’s proposal to create a new Consumer Financial Protection Agency.

  Ok, so what’s up here. The fact is Kohn is trying to perpetuate a myth that began with Paul Volcker and continued with Alan Greenspan–that the Fed is independent. In fact, by law, Congress has the authority to closely scrutinize the Fed but has lacked the political spine to do so. Congress has, for example, refused to direct the Fed to follow the Fed’s dual mandates: price stability AND full employment…guess which one of the mandates the Fed doesn’t care about anymore?

   Be that as it may, Ron Paul, who is wacky on other things, is right to try to give the CBO some more specific authority to audit the Fed–which seems pretty modest, frankly. And the idea that the Fed has any interest in consumer protection is just a complete crock.