Former Federal Reserve Chairman Alan Greenspan was shocked—shocked!—that financial executives failed to regulate themselves during the euphoric run-up to what he described as the current global solvency crisis.

Speaking to the Economic Club of New York on Tuesday night, Greenspan, who served four presidents from 1987 to 2006, said he had long-believed that banks and other financial institutions would regulate themselves, holding prospective counterparties up to reasonable business standards to protect their own interests.

"When that premise failed, I was deeply...dismayed," he said. "Self-regulation is a first-line defense."

Greenspan said he was "appalled" by the risks that financial institutions assumed to create the credit bubble that developed under his leadership of the Fed, a period of low interest rates and minimal government regulation.

Greenspan said he has since "reluctantly" concluded that there is no alternative to more rules and regulations in the financial sector.

He said efforts to predict or avoid another crisis by micromanaging complex financial institutions were likely to fail. Instead, he said that regulators should make sure that financial institutions maintain higher levels of capital, boosting their ability to survive shocks to the system.

Not so long ago, it was common for transactions to be conducted with a ratio of 50 percent debt to 50 percent equity; toward the end of the 20th century leverage rose so that 20 percent equity was not unusual. Only in recent years did equity levels of 10 percent become common.

Until private capital returns to the market, Greenspan said, the government will have to make up for the shortfall. He added that the cost of the bailout will exceed the money that has been spent so far.

Greenspan said that regulators understand bubbles and the crises that follow them. But they need to develop a better comprehension of the timing from the upside of the cycle to the downside.

Many critics say that Greenspan could have done a better job of managing the economy by being less accommodating with low rates, but the former Fed chief yielded no ground at the Economic Club.

When Jacob Frankel, vice chairman of American International Group, asked Greenspan how, in hindsight, different economic policy decisions in the boom years might have minimized the current pain, Greenspan argued that the only way to avoid price bubbles is to keep interest rates high all the time.

The Fed raised rates in the mid 1990s to tamp down rising stock prices, and that effort was successful for a year, he noted. But as soon as the Fed began to ease, stock prices rocketed right back up.

"It would be very desirous to find a way to suppress asset bubbles," he said. "But the trouble is, it has never been done and I am very skeptical that it will be done."