NEW YORK (CNNMoney.com) -- Alan Greenspan told a panel investigating the causes of the financial crisis Wednesday that steps can be taken to limit the impact of another shock, but the former Federal Reserve chairman warned that regulators can't fully prevent another crisis from happening.
In written testimony before the Financial Crisis Inquiry Commission, Greenspan said the recent crisis highlights the limitations of government oversight in the financial markets.
"Regulators cannot successfully use the bully pulpit to manage asset prices, and they cannot calibrate regulation and supervision in response to movements in asset prices," he said. "Nor can they fully eliminate the possibility of future crises."
Still, the former Fed chief argued that increased capital and collateral requirements for financial institutions could help mitigate risks and safeguard the system. He also said regulators should do more to prevent predatory lending and address threats posed by institutions that are considered too big to fail.
Greenspan, who was chairman of the U.S. central bank from 1987 to 2006, has been criticized for not increasing the Fed's benchmark interest rate in time to prevent the housing market from becoming overheated. The housing bubble eventually burst in 2008, giving rise to a wave of foreclosures and plunging the economy into a deep recession.
The commission, which was established last year to examine the causes of the financial crisis, is hearing testimony this week from a number of former federal officials, bankers and mortgage industry executives about the near collapse of the housing market.
The hearings are aimed at exploring how the issuance of trillions of dollars worth of risky subprime mortgage debt contributed to the financial meltdown. Specifically, the commission wants to explore the Federal Reserve's authority to regulate unfair and deceptive mortgage practices.
In response to a question from commission chairman Phil Angelides about why the Fed did not move faster to contain the spread of subprime lending, Greenspan said the central bank has limited power to enforce regulations, and defended the steps he took to ensure consumer protection.
"When you've been in government for 21 years, as I have been, the issue of retrospect and what you should have done is a really futile activity," he said. "I was right 70% of the time, but I was wrong 30% of the time, and there were an awful lot of mistakes in 21 years," he added.
While Greenspan has acknowledged that the Fed failed to grasp the severity of the crisis, he maintains that the low interest rate policy the central bank maintained during his tenure did not inflate home prices.
Greenspan said the subprime mortgage crisis had its root in the securitization of risky home loans into assets that were divided and sold around the world. He said the market for such securities ballooned to more than $900 billion by 2007.
The former chairman said strong investor demand for mortgage-backed securities artificially boosted home prices. He said government-sponsored enterprises, such as mortgage lenders Fannie Mae and Freddie Mac, also contributed to the spread of subprime loans.
Greenspan also blamed banks for relying too heavily on the flawed judgment of credit ratings agencies to assess the value of mortgage-backed securities and dropping the ball when it comes to risk management.
In addition to Greenspan, the 10-member commission will hear testimony on supbrime mortgage origination and securitization from former executives at Citigroup (C, Fortune 500) and New Century Financial Corp., once one of the nation's largest subprime lenders.
On Thursday, former Citi chief executives Chuck Prince and Robert Rubin will go before the commission.
The commission is also investigating the role government-sponsored enterprises played in the housing market meltdown. Former Fannie Mae executives Robert Levin and Daniel Mudd are due to testify Friday.
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