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Greenspan ‘shocked’ at credit system breakdown

Despite concerns he had in 2005 that risks were being underestimated by investors, "this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said in remarks prepared for delivery to the House of Representatives Committee on Oversight and Government Reform.

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

Banks and other financial institutions need public support, such as the recently approved $700 billion bailout package, to avoid serious retrenchment, he said.

Greenspan was hailed as one of the most accomplished central bankers in U.S. history when he retired in January 2006. However, his decision to keep interest rates low during his final years at the Fed has been blamed in part for the housing bubble and crash that has led to the current deep financial crisis.

The former Fed chair said stabilization of U.S. housing markets -- a necessary precondition for the economy to heal -- is "many months in the future."

At the heart of the breakdown of credit markets was the securitization system that stimulated appetite for loans made to borrowers with spotty credit histories, Greenspan said.

"Without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer," he said.

"The consequent surge in global demand for U.S. subprime securities by banks, hedge and pension funds supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem," he added.