Greenspan told the House Oversight Committee on Thursday that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had proved to be wrong.
Greenspan said he had made a "mistake" in believing that banks operating in their self-interest would be enough to protect their shareholders and the equity in their institutions.
Greenspan said that he had found "a flaw in the model that I perceived is the critical functioning structure that defines how the world works."
Greenspan called the global financial crisis is a "once in a century credit tsunami" that policymakers did not anticipate.
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Some critics have blamed Greenspan for contributing to the problem by leaving interest rates too low for too long and for failing to regulate risky banking practices such as the issuance of subprime mortgage. But he put the blame on soaring mortgage foreclosures on overeager investors who did not properly take into account the threats that would be posed once home prices stopped surging upward.
He said that he and others who believed lending institutions would do a good job of protecting their shareholders are in a "state of shocked disbelief." And Greenspan also blamed the problems on heavy demand for securities backed by subprime mortgages by investors who did not worry that the boom in home prices might come to a crashing halt.