Alan Greenspan, so long regarded as the ultimate - and most trusted - voice of financial reason in the United States, now concedes he erred by misreading certain critical aspects of the economy. Testifying on Capitol Hill yesterday, the former chairman of the Federal Reserve said the current crisis had "turned out to be much broader than anything that I could have imagined."

Under questioning from Rep. Henry Waxman, the California Democrat who chairs the House Government Oversight Committee, Greenspan acknowledged that the self-regulation he had expected to prevail in the financial community represented "a flaw in the model" he relied upon.

"I was going for 40 years or more on the perception that it was working well," he explained. For 18 of these 40 years, Greenspan was the Fed chairman and as such was accorded virtually undisputed respect for his views. Those who disagreed with him were given short shrift.

Greenspan called the financial crisis a "once in a century credit tsunami" and confessed he was "in a state of shocked disbelief" that banks and investment firms did not do a better job of analyzing the risks associated with investing in home mortgages extended to less creditworthy borrowers. Like many politicians, Greenspan assumed the financiers and their allies would adequately regulate themselves.

And, of course, many Republicans in particular and conservatives in general believe that government ought to get out and stay out of the way of business, that because it is in their own self-interest executives will do what's right without having a federal agency looking over their collective shoulders. Besides getting annoyingly in the way of free enterprise, federal agencies gobble up tax revenues, and that's what fuels the "starve the beast" (the "beast" being the government) mentality of some right wing diehards.

As Fed chairman, Greenspan consistently opposed regulation of the practices that allowed sub-prime mortgages to be bundled into larger securities and sold to investors. In time, those securities burdened the balance sheets of banks and other financial companies when the underlying loans began to go south.

Greenspan also was in charge during a period of low interest rates that helped encourage loose lending practices. Yet the broadly held assumption was that sophisticated analysts at these banks, investment firms and hedge funds would take into account the risks involved in such practices and price the investments accordingly. That, as we now know all too well, simply didn't happen.

"It was the failure to properly price such risky assets that precipitated the crisis," Greenspan testified yesterday, because it encouraged investors - worldwide - to regard American subprime loans as a "steal" rather than the uncertain bet they really were. "The whole intellectual edifice … collapsed in the summer of last year."

If Greenspan opposed additional regulations during his heady days at the Fed, he now has seen the error of his ways. He told the Congressional committee yesterday that he sees "no choice" but to force (that can only mean by federal regulation) the financial firms that package mortgage loans to "retain a meaningful part of the securities they issue" to keep them responsible if the underlying loans go bad.

"There are additional regulatory changes that this breakdown of the central pillar of competitive markets requires in order to return to stability," he told Waxman's committee.

We can only wish Greenspan had shown such insight earlier. Had he done so, we might have avoided the present economic crisis, one he concedes will last for some time to come.