Greenspan: It's a 'credit tsunami'

NEW YORK (CNNMoney.com) -- Former Federal Reserve Chairman Alan Greenspan told a House committee Thursday that the nation will emerge from the current credit crisis with a "far sounder financial system."

"We are in the midst of a once-in-a century credit tsunami," Greenspan told the House Oversight and Reform Committee.

But he said that less-risky decisions by investors will help pull the markets out of their slump. "Investors, chastened, will be exceptionally cautious," he said.

Committee members weren't buying Greenspan's rosy forecast, lambasting him and two other officials - SEC chairman Christopher Cox and former Treasury Secretary John Snow - for failing to prevent the credit crisis and for refusing to take responsibility for it.

In his opening statement, Rep. Henry Waxman, D-Calif., committee chairman, said the current economic crisis could have been prevented "if regulators had paid more attention and intervened with responsible legislation. The list of regulatory mistakes and misjudgments is long and the cost to taxpayers and the economy is staggering."

Waxman put Greenspan on the spot, asking if he made any mistakes during his tenure as Federal Reserve chairman that may have contributed to the mortgage crisis.

Greenspan said he made a mistake in presuming that lenders themselves were more capable than regulators of protecting their finances. He said he was "shocked" when that system "broke down."

"I still do not understand exactly how it happened," said Greenspan.

Greenspan offered some proposals for regulatory changes in his testimony, namely "to require that all securitizers retain a meaningful part of the securities they issue."

In other words, he wants to require lenders to own or back part of the loans they issue, rather than pass off the risk to someone else.

Greenspan also stated his support for the $700 billion Wall Street bailout approved by Congress, which allows the U.S. government to buy bad mortgage investments from finance firms.

The bailout is intended to thaw the credit freeze by freeing up firms to offer new loans. "Indeed, the impact is already being felt," said Greenspan. "Yield spreads are narrowing."

But Greenspan also said that whatever regulatory changes are made to respond to the crisis, "they will pale in comparison to the change already evident in today's markets."

Because of their hard-won experience, markets "will be far more restrained than would any currently contemplated new regulatory regime," he said.

Throughout the hearing, committee members harangued Greenspan, Cox and Snow for dodging blame, and for claiming that they didn't know how bad it was until it was too late.

Rep. Elijah Cummings, D-Md., lashed into Cox for waiting until September before urging Congress to regulate credit default swaps, a complex financial instrument that many people blame for spurring the crisis.

But Cox replied that Congress shares the blame. "We don't have authority to regulate credit default swaps because Congress hasn't given us this authority," he said.

In answer to accusations that he isn't taking enough action to address the crisis, Cox said the SEC is undertaking 50 investigations into subprime lending. High-risk subprime loans have been blamed for helping fuel the housing bubble and its subsequent collapse.

Snow also defended his former role with the Treasury. "We didn't duck our responsibilities; we assumed them," he said.

But Rep. Mark Souder, R-Ind., said his constituents "seem legitimately angry that people sit here, hearing after hearing, and say it's not their responsibility."

Waxman told Greenspan, Cox and Snow that the purpose of their jobs, and the agencies they headed, "is so you can see problems developing, and tell us about them, before the financial crisis. The reality is that there's a long list of warning signs and prominent economists saying things should have been done."

Snow and Cox both suggested that greater transparency be imposed on the markets.

Snow suggested a "more coordinated and less fragmented approach to financial regulation" with "greater international cooperation."

Cox said the SEC has adopted measures to strengthen investor protections against naked short-selling, which allows short-selling without owning or borrowing the stock.

He said he has also launched an examination "of the effectiveness of broker-dealers' controls on preventing the spread of false information." This appears designed to address concerns that short sellers, who seek to profit from declines in stock prices, may spread rumors about companies to drive down prices of their stocks.