Paulson said he expects the housing sector recovery to be a more forceful driver of the economy in the future, predicting that GDP will grow faster by the end of the year.

He said market liquidity is improving as investor confidence gradually recovers, though it is not improving in all sectors. Paulson explained spreads are still elevated and that securitized credit and interbank lending are still not functioning normally.

Housing remains the biggest risk in the economy, he said, adding that strong regulation from Freddie Mac and Fannie Mae would bring confidence to U.S. mortgage markets. He predicted that the home foreclosure rate will remain elevated for some time as the correction in excess mean housing has further to go.

Paulson also commented that Federal Reserve loans to non-financial institutions raise "difficult issues".

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