President George W. Bush announces the nomination of Ben Bernanke as Chairman of the Federal Reserve, replacing Alan Greenspan upon his retirement in January 2006. The announcement came Monday, Oct. 24, 2005, in the Oval Office.

Former Federal Reserve Chairman Alan Greenspan said today that he “made a mistake” in believing banks and others would protect their shareholders and own firms’ equity. He was “shocked” to learn of the breakdown in lending standards and risk management at the firms that lead to the current credit crunch. Greenspan admitted that he “found a flaw” in his ideology and “that’s precisely the reason I was shocked.”

“I still do not fully understand why it happened and obviously to the extent that I figure where it happened and why I will change my views. If the facts change I will change,” he told the House Oversight Committee of the US Congress.

Rep. Henry Waxman, chairman of the committee, challenged Greenspan and asked “You found your view of the world…was not right?”

"We are in the midst of a once-in-a century credit tsunami,"Greenspan said.

He 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," Greenspan said.

"Investors, chastened, will be exceptionally cautious,"he added.

In opening statements, Rep. Henry Waxman, 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 asked Greenspan if he made any mistakes during his 18-year 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 said in his testimony that it should mandated "to require that all securitizers retain a meaningful part of the securities they issue." He wants to require lenders to own or back part of the loans they issue, rather than pass off the risk to someone else.

"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," he said.

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 US."

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

Greenspan had opposed regulation of derivatives, including swaps, in 2000 and said today that derivatives by and large “are working well.” The exception is credit default swaps, which triggered the near collapse of insurance giant AIG - American International Group. He said he has “a serious problem” with them.