Dec. 1 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson said his department is working to expand the availability of capital to businesses and consumers and may use funds from the $700 billion bank rescue plan to help homeowners.

“We are actively engaged in developing additional programs to strengthen our financial system so that lending flows into our economy,” Paulson said in the text of a speech in Washington. “We are continuing to examine potential foreclosure mitigation ideas that may be an appropriate use” of funds from the Troubled Asset Relief Program.

With less than two months to go in the Bush administration, Paulson is using the TARP to try to alleviate the worst financial crisis in almost 80 years. The Treasury last week committed $20 billion to a Federal Reserve lending plan to help consumers and businesses access credit.

Paulson has defended his decisions to rescue some financial institutions while letting others fail as necessary to help financial markets recover. Last month he abandoned the original intent of TARP to purchase bad mortgage assets, prompting criticism from lawmakers who backed the legislation creating the legislation.

“While we are making progress, the journey ahead will continue to be a difficult one,” he said. “But I have confidence that we are pursuing the right strategy to stabilize the financial system and support that flow of credit into our economy.”

The remarks came amid confirmation that the U.S. economy is in a recession. The panel that dates American business cycles today said the economy began contracting a year ago this month.

Another $350 Billion

The Treasury has committed all except $20 billion of the first half of the TARP funds in injecting capital into banks, AIG and Fannie and Freddie. Paulson hasn’t indicated whether he will go to Congress to request the remaining $350 billion approved for TARP before President-elect Barack Obama takes office next month.

Paulson has resisted calls from Congress to force banks who participate in TARP to use the funds for lending.

“We expect banks to increase their lending as a result of these efforts and it is important that they do so,” he said. “This lending won’t materialize as fast as any of us would like, but it will happen much, much faster as confidence is restored.”

To contact the reporters on this story: John Brinsley in Washington at jbrinsley@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net

Last Updated: December 1, 2008 15:03 EST