Treasury Secretary Henry Paulson said on Tuesday the global economy is strong and liquidity will return to normal in financial markets once investors reprice risk.
Credit is being repriced, reassessed across our capital markets, Paulson told CNBC television.
As the Fed addresses liquidity this makes it possible, this makes it easier, for the market to focus on risk and pricing risk, he said. This will play out over time and liquidity will return to normal when the market has a better understanding, investors have a better understanding, of the risk-return trade off.
Paulson said strong economies in the United States and around the world will help buffer against shocks from a credit crisis that began with a wave of subprime mortgage delinquencies.
We have the benefit of having a very strong economy to absorb some of the losses along the way, he said.
However, turmoil in capital markets will likely take a toll on economic growth, Paulson said.
Economic growth will be less than it ordinarily would have been, he said.