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Exclusive: Paulson Says Economy 'Solid,' Housing Woes Not Over

Treasury Secretary Hank Paulson told CNBC that the U.S. economy remains healthy but that troubles in the housing market may take some time to play out.

Paulson also said he was not concerned with a recent report suggesting China may retaliate economically if the U.S. imposes trade sanctions to force a revaluation of the yuan.

"If you go to the economy, the fundamentals are very solid," Paulson told CNBC's Maria Bartiromo on "Closing Bell."

"The markets have been unsettled largely because of disruptions in the subprime space, there's no doubt about that," he added.

Paulson's comments echoed those made earlier by President Bush, who said the U.S. economy was solid and well-positioned to deal with the stress from continuing financial market volatility.

"There is a lot of liquidity in our system and liquiditywill provide the capacity for our system to adjust," Bush told a small group of reporters invited to a 45-minute session with
him at the Treasury Department, Reuters reported.

Bush also roiled financial markets when he said the government-sponsored enterprises Fannie Mae and Freddie Mac need to be reformed before talks of assisting with the subprime mortgage meltdown.

Paulson, meanwhile, acknowledged in the CNBC interview that both the stock and bond markets are reassing risk.

"We've had periods of excess here for awhile and whenever you're in a period of benign economic conditions and liquidity there are going to be some excesses," he said. "There has been a major correction in the housing area. We're not downplaying that and it will take awhile to work through that but the overall economy is healthy."

Paulson, who recently met with top officials in Beijing, also acknowledged recent tensions but said the U.S. want to continue to build up an economic relationship with China.

The Treasury Secretary's comments come amid a report published in a British tabloid regarding a campaign by the Chinese government to threaten economic hardball with the U.S.

The article says two lower level officials said in recent interviews China could use its foreign reserves to pressure Washington if the U.S. imposes trade sanctions to force China to revalue its currency. In addition, the potential threats were described as the "nuclear option" in state media reports, the article stated.

"I think it's absurd, frankly, I just got back from china, I met for a couple of days with all of the leaders ... and we actually talked about investment and the Chinese would like to increase their investment in the U.S.," Paulson said. "They're focused on the same thing any investor is focused on: the best risk-adjusted rate of return."

"If you've got 100 things to worry about, I'd worry about that last," Paulson added.

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