The unemployment rate currently stands at around 10 percent, which Paulson said was "the best possible outcome." He said he did not like the idea of a bank bailout but considered it crucial to save the economy.
"What was very hard for me was advocating things that I hated," he said. "And having to defend them to members of Congress that found it repugnant to have the government have ownership positions or put equity in banks."
Congress, however, was not willing to go along with the plan, Paulson said, unless he would be able to sell the idea to the American people.
"They wanted us to tell the American people how bad things could get," Paulson said. "I shuddered, because I thought, to the extent we scared people, it was going to make the crisis worse."
He says he faced an "awful reality."
"I believe that if the system collapsed, we easily could've seen unemployment of 25 percent," he said. "I think we came very, very close."
Paulson, who previously served as the Chairman and CEO of Goldman Sachs, commended the Obama administration for the steps it is taking to fix the financial system. The administration, including Federal Reserve Chairman Ben Bernanke, has come under intense criticism for the bank bailout. Bernanke won confirmation for a second term Thursday, but only by the closest vote.
Paulson said, however, a better financial regulatory system must be established.
"We need a regulator responsible for risks across the entire system," he said.