Paulson: Housing Is Still Biggest Threat to Economy

The U.S. economy has "turned down sharply" and is at risk of weakening further because of the slump in housing, Treasury Secretary Henry Paulson said.

Henry M. Paulson, US Treasury Secretary
Henry M. Paulson, US Treasury Secretary

In a speech to pension fund and endowment managers at a Council of Institutional Investors, Paulson avoided the word "recession," unlike Federal Reserve Chairman Ben Bernanke, who said last week that "recession is possible."

But Paulson said "the risks are to the downside" and that housing remains the chief threat in that downside risk.

Paulson said he was focusing on things that could be done quickly to help both the housing and financial markets and urged financial institutions to do the same.

"The message I give," he said is, "if you think you're going to need capital, don't be looking for the government" to help, "go raise it." And if that means raising capital from foreign Sovereign Wealth Funds, "I welcome that," Paulson said. "This is a good thing."

He criticized Congress again for not passing bills reforming the Federal Housing Administration and regulation of housing finance companies Fannie Mae and Freddie Mac .

The expansion of their mortgage purchasing and securitizing ability by regulators, Paulson said, is critical in efforts to help the ailing mortgage market.

"That's very, very important, " Paulson said. "What they do here is going to be more important than a lot of things that are being considered by Congress right now. It's very important that they continue to play an active role."

Influential Democrats are pushing a plan that would expand the FHA's role far more than the administration envisions, including refinancing of mortgages on a mass basis if lenders write down their loan value.

Paulson's remarks echoed those he made a week ago in Beijing, when he said the US economy had taken a sharp turn for the worse and is facing a tough quarter.

"There is no doubt we're having a tough quarter, that the economy has turned down sharply," Paulson said.

But he said a swoon in the housing sector, which was largely to blame for the rough patch, was necessary.

"We need to have this correction. It's not pleasant, but we need to have it," Paulson said in reference to declining U.S. house prices and homebuilding.

-- AP and Reuters contributed to this report.