Alan Greenspan, the former Chairman of the Federal Reserve, has declared the financial crisis a “once in a century credit tsunami” and gave warning that it would lead to mass unemployment.

Mr Greenspan blamed the global economic meltdown on investors’ insatiable appetite for bonds backed by increasingly suspect mortgages. He said: “It was the failure to properly price such risky assets that precipitated the crisis.”

But Mr Greenspan’s critics said that he left interest rates too low in the early part of this decade, spurring an unsustainable housing boom.

Speaking at a congressional hearing into the meltdown, Henry Waxman, a California Democrat, said that Mr Greenspan had “the authority to prevent irresponsible lending practices that led to the sub-prime mortgage crisis”.

Mr Waxman said: “You were advised to do so by many others. And now our whole economy is paying the price.”

Mr Greenspan admitted that he was “partially” wrong in his opposition to tighter regulation, and added that he was in a state of “shocked disbelief” that shareholders were not protected.

Separately, Henry Paulson, the US Treasury Secretary, has rejected criticism that he did not save Lehman Brothers from bankruptcy by protesting that he “didn’t have the powers” to prevent the broker’s collapse.

Mr Paulson told The New York Times that it would have been illegal for the US Government to bail out Lehman because the bank’s assets were so toxic that they could not have acted as collateral for any loan. “If someone thinks Hank Paulson could have made the Fed save Lehman Brothers, the answer is ‘no way’,” Mr Paulson said, pointing out that the recipients of government money had much safer assets.

His comments came as it emerged that the US Treasury is working with the Federal Deposit Insurance Corporation (FDIC) to devise ways of enticing banks to rewrite the terms of mortgages to help struggling borrowers stay in their homes. The head of the FDIC, America’s banking insurer, said that the two organisations were drawing up plans to offer federal loan guarantees on mortgages. Under the legislation approved to bail out American banks, the Treasury has also been empowered to use taxpayers’ money to guarantee lower repayments.

Dick Fuld, the chief executive of Lehman, was among the biggest critics of the US Government’s decision not to bail out the brokerage.

Speaking at a hearing earlier this month into Lehman’s collapse, Mr Fuld said that he would wonder “until they put me in the ground” why the Government did not rescue his group.

Mr Paulson retorted yesterday that he had long urged Mr Fuld to find a solution for Lehman’s problems. “He was asked to aggressively look for a buyer,” Mr Paulson said.

The Treasury Secretary said that he made personal pleas to other companies to buy some of Lehman’s toxic assets or the entire brokerage but, like Mr Fuld, he was unable to find a buyer.

Mr Paulson acknowledged that he could have seen the sub-prime problems coming earlier. “But I’m not saying I would have done anything differently,” he said.

His detractors argue that Mr Paulson and Ben Bernanke, the Chairman of the US Federal Reserve, wasted valuable time finalising the details of the $700 billion (£434 billion) government bailout.