The U.S. economy "has turned down sharply" according to U.S. Treasury Secretary Henry Paulson, speaking to the Council of Institutional Investors in Washington, D.C. on Thursday morning.

He said the greatest risk to the economy was the housing sector. However, Paulson noted some positive developments recently, particularly in the Hope Now alliance, and an increase in market share from Fannie Mae and Freddie Mac.

He also criticized Congress for failing to pass legislation on GSE reforms and reaffirmed his calls for stronger oversights of the two institutions.

Commenting on his proposals for an overhaul of the financial system in the United States, he expressed the necessity for the creation of a regulator of bank and non-bank institutions. He also proposed a union between the SEC and CFTC, which would have very important responsibilities.

He also expressed his backing of the Fed's recent actions allowing primary dealers to access the discount window, saying it was unclear whether or not the move should be made permanent.

On the subject of sovereign wealth funds, he said investments in the United States were welcome, and displayed a high degree of confidence in the U.S. economy.

Paulson also explained the government's fiscal stimulus package should help counter some of the downside risks to economic expansions.

By Erik Kevin Franco edited by Cristina Markham