The committee hearing comes amid growing calls for government assistance to be extended to the US's troubled auto industry, as leaders of the nation's top three auto firms prepare to ask the US Senate for more financial assistance from the US government later on Tuesday.
Buying such "toxic debts" would have required a "massive commitment" of
the bailout money, Paulson said.
The US government has had to act swiftly to assess the situation and adjust its strategy in dealing with the crisis accordingly, he said.
"If we have learned anything throughout this year, we have learned that this financial crisis is unpredictable and difficult to counteract,'' Paulson said.
Ben Bernanke, the chairman of the US Federal Reserve, also told the committee that using the bailout to buy stakes in US banks was "critical" for restoring confidence and improving US credit markets, warning that lending conditions remained "still far from normal."
Stocks made some gains on Tuesday, with the Dow Jones Industrial Index up more than 160 points half way through trading to 8440 points, although analysts said the gains were mainly technical adjustments after recent very heavy losses.
|Critics say not enough is being done to
prevent foreclosures [GALLO/GETTY]
However, Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation, said $24 billion of the bailout plan's funds should be used to assist troubled homeowners hit by the US subprime mortgage crisis, in which millions of Americans were granted mortgages they later were unable to repay.
"We must decisively address the mortgage problem as part of our wider strategy to restore confidence and stability to our economy," she told the committee.
"It is essential to utilise this authority to accelerate the pace of loan modifications in order to halt and reverse the rising tide of foreclosures."
Several committee members also had strong words for Paulson over the decision to shift the focus of the bailout funds, with Maxine Waters, congresswoman for California, accusing Paulson of not addressing the problem.
"We gave [you] the money to deal with foreclosure efforts ... toxic assets were at the centre of this crisis ... you took it upon yourself to ignore all that ... somehow you'd abandoned the whole foreclosure reduction thing."
Barney Frank, head of the committee, also criticised the decision not to use more of the funds for preventing foreclosures, saying there was an "overwhelmingly powerful set of reasons" for doing so.
Of the $700 billion plan, $290 billion has so far been paid out, including $250 billion to banks and a $40 billion loan to American International Group (AIG).
The US government's decision to keep some money in reserve means many of the big decisions about how to use the fund will be delayed until Barack Obama, the US president-elect, takes office.
The chairmen and chief executives of General Motors, Ford and Chrysler, the so-called Big Three auto giants, along with union representatives, will appear before the Senate Banking, Housing and Urban Affairs Committee later on Tuesday to ask for $25 billion to assist their struggling industry.
Democrats in US congress are preparing to press Republicans to pass a bill granting separate funds to rescue the ailing industry. The White House has, however, said the bailout package should not be used for the industry.
Dana Perino, White House spokeswoman, said on Monday that the funds should come instead from a separate $25 billion loan programme developed by the US department of energy.
Perino, although stressing that the Bush administration "does not want US automakers to fail", said that providing money from the bailout to other firms apart from financial companies would begin a "slippery slope".