Alan Greenspan, whose once-sterling reputation for economic savvy has come under attack during the recent financial turmoil, told a congressional committee Thursday that he was "shocked" that lenders' self-interest in protecting their shareholders did not prevent the current crisis.

Skeptical and even cranky lawmakers—who returned to Washington amid election campaigns in which they faced tough questions from their constituents—were clearly in the mood to pin blame on Greenspan, or anyone, for failing to prevent the economy's spiral.

"The Federal Reserve had the authority to stop the irresponsible lending practices that fueled the subprime mortgage market," said Henry Waxman, Democrat of California, head of the House Oversight and Reform committee, which is holding a series of hearings to grill actors in the meltdown.

Lawmakers had summoned Greenspan, along with Christopher Cox, head of the Securities and Exchange Commission, and John Snow, a former Treasury Secretary, to help them figure out what the regulators did wrong, and what can be done to prevent a future occurrence.

Greenspan, who appeared aloof and scholarly—and maybe more than a little offended at being challenged so pointedly—spent four hours in the congressional hot seat, repeatedly defending his decisions and insisting that his hands-off-the-free-market beliefs had not influenced the amount of government oversight.

Sparring with Waxman, Greenspan conceded that he was "partially" wrong not to have moved against credit default swaps. He said his belief that banks and others were best situated to protect their own interests was flawed. That was a "shock," he added.

"This crisis, however, has turned out to be much broader than anything I could have imagined," he said, adding that given the financial damage already done, "I cannot see how we can avoid a significant rise in layoffs and unemployment."

No one had a complete understanding of the financial landscape, Greenspan said, adding that he didn't fully understand what had happened.

People who relied on the "self-interest of lending institutions to protect the shareholder's equity (myself especially) are in a state of shocked disbelief," he said. "Such counterparty surveillance is a central pillar of our financial markets' state of balance. If it fails, as occurred this year, market stability is undermined."

Stabilization of house prices is indispensable, Greenspan said, but predicted "that is many months in the future."

Committee Democrats could barely contain their exasperation, but they weren't alone. Tom Davis of Virginia, the committee's ranking minority member, called credit default swaps "basically legalized gambling" and wondered why more had not been done to regulate them.

Greenspan, who left the Fed in 2006, told him—and other lawmakers—that the swaps had only become a problem in the past two years. That implied that it was a problem that had cropped up after his watch was over.

Cox, once a lawmaker himself, came under repeated questioning. John Mica, Republican of Florida, pressed the Republican view that the whole financial mess is the fault of Fannie Mae and Freddie Mac for encouraging home ownership for poor people.

"There are those who should go to jail," Mica said, without elaborating.

Cox, whose agency said it is investigating 50 cases of subprime lending, said that "aggressive law enforcement is needed now more than ever."

Waxman—clearly annoyed by digs that he had delayed the committee's hearing on Fannie and Freddie until after the election—interrupted others several times to outline the role the two institutions played. He insisted that their 13.7 percent share of the market "are hardly market-driving numbers."

So what did go wrong? According to Greenspan, subprime mortgages pooled and sold as securities "became subject to explosive demand from investors around the world."

Sophisticated investors "wrongly viewed them as a 'steal,'" because U.S. home prices were rising and foreclosure rates "were deceptively modest," he said.

Pressures on lenders to supply more securities "collapsed subprime underwriting standards from 2005 forward."

However, he warned that the "type of regulation to prevent this in the future is onerous."