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Alan Greenspan says the US economy is experiencing a "credit tsunami" and warns it will be "many months" before confidence will be restored.

The former Federal Reserve chairman told the House of Representatives' committee on oversight and government reform he believed the stabilisation of house prices was the vital precursor to recovery.

And he warned the "financial damage to date" meant it would not be possible to avoid "a significant rise in layoffs and unemployment".

"The necessary condition for this crisis to end is the stabilisation of home prices in the United States," he said.

"They will stabilise and clarify the level of equity in US homes – the ultimate collateral support for much of the world's mortgage-backed securities. At a minimum stabilisation of home prices is still many months in the future."

Mr Greenspan said he had warned about the protracted under-pricing of risk as early as 2005.

He added the crisis "turned out to be much broader than anything I could have imagined", saying it had "morphed" into one where fears about insolvency are paramount.

Nevertheless, his initial comments finished with an optimistic assessment of how the eventual recovery will take place.

"When it [property market stabilisation] arrives the market freeze should begin to measurably thaw and frightened investors will take tentative steps towards re-engagement with risk," he added.

"Broken market ties between banks, pension and hedge funds and all types of non-financial businesses will become re-established and our complex global economy will move forward."