Greenspan in 'Shocked Disbelief,' Admits Errors

In testimony to the House Government Oversight Committee, Greenspan acknowledged that the crisis "has turned out to be much broader than anything I could have imagined. It has morphed from one gripped by liquidity restraints to one in which fears of insolvency are now paramount."

"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity (myself especially) are in a state of shocked disbelief," according to Greenspan.

The panel chairman, Henry Waxman, D-Calif., criticized Greenspan's approach to mortgage regulation while he was Fed chairman. The Fed "had the authority to stop the irresponsible lending practices that fueled the subprime mortgage market," Waxman said, but Greenspan "rejected pleas that he intervene."

Rep. John Yarmuth, D-Ky., hit Greenspan even closer to home, calling the avid baseball fan one of "three Bill Buckners," a reference to the infamous Red Sox first baseman whose flubbed handling of an easy grounder cost the Red Sox the 1986 World Series. Former Treasury Secretary John Snow and SEC head Christopher Cox, who both testified along with Greenspan, also got tagged with that comparison.

However, Greenspan said he raised concerns about the dangers of the "underpricing of risk" as early as 2005.

But when Waxman pressed "were you wrong" about the benefits of deregulation, Greenspan responded, "partially." The "flaw" in the assumptions he had over four decades, Greenspan said, was that lending institutions themselves were best able to protect the interest of their shareholders.

Thus what looked like a solid edifice to his thinking broke down, Greenspan said.

Greenspan said there should be more regulation of credit default swaps, but also noted that excluding those instruments, the derivatives market is functioning well.

Turning to the economic outlook, Greenspan suggested the financial crisis currently gripping the U.S. will take many months to improve, meaning higher unemployment and softer consumer spending is likely ahead.

"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," Greenspan said in the text of prepared testimony to the U.S. House Government Oversight and Reform Committee.

That, in turn, "implies a marked retrenchment of consumer spending as households try to divert an increasing part of their incomes to replenish depleted assets, not only in their 401Ks but in the value of their homes as well," Greenspan said.

While Greenspan assured lawmakers that "this crisis will pass" and that the U.S. will end up with a "far sounder financial system," he warned that it won't come quickly.

Greenspan said a "necessary condition for this crisis to end is a stabilization of home prices in the U.S."

"At a minimum, stabilization of home prices is still many months in the future," he said.

-- Brian Blackstone, Dow Jones Newswires