Former Federal Reserve chairman Alan Greenspan has slammed the US government's handling of the bailout pledge to mortgage finance firms Fannie Mae and Freddie Mac, saying shareholders should have been made to suffer.

He says Treasury Secretary Hank Paulson was right to rescue the companies but wrong to pledge virtually limitless shareholder funds.

"They should have wiped out the shareholders, nationalised the institutions with legislation that they are to be reconstituted, with necessary taxpayer support to make them financially viable," he told the Wall Street Journal.

The firms should then have been auctioned off to private investors, he said.

Paulson's spokeswoman, Michele Davis, hit back, saying her boss's plan had provided confidence "in the immediate term".

While at the Fed, Greenspan warned for years that the two mortgage giants' business model threatened financial stability.

Critics say Greenspan is partially responsible because he kept interest rates too low for too long. He recently hit the media circuit to defend his record.

US house prices will begin to stabilise or hit bottom in the first half of next year, he says, but hedged his bets, saying that even at a bottom "prices could continue to drift lower through 2009 and beyond".

"Stable home prices will clarify the level of equity in homes, the ultimate collateral support for much of the financial world's mortgage-backed securities," he said.