The Washington Post published excerpts from reporter Neil Irwin's new book, The Alchemists: Three Central Bankers and a World on Fire, under the headline, "three days that saved the world financial system." The headline is seriously misleading since it may cause readers to believe the world somehow would have lacked a financial system if the central bankers in Irwin's story had not succeeded in their efforts.

This is not true. Had a financial collapse actually been the outcome, the central banks had the ability to take over failed banks and restart the system. (This is what the FDIC does all the time.) We would most likely see something similar to what Argentina experienced when it defaulted on its debt in December 2001 and broke the link of its currency to the dollar or what Cyprus is seeing today.

Presumably banks would be shut for a relatively short period of time until the regulators could do some preliminary workarounds. Then people would only be allowed access to a limited portion of their deposits, as is now the case in Cyprus. This situation might persist for weeks or possibly months as more money would gradually be freed up for withdrawal.

If Argentina is viewed as the model, this situation would likely lead to a sharp downturn, but then a quick bounce back. By the summer of 2003 Argentina had made up all of the ground lost in the downturn. It was growing rapidly at the time and continued to grow rapidly until the world recession brought growth to a standstill in 2009.

Source: International Monetary Fund.

While the immediate hit from the financial collapse would have almost certainly been worse than what Europe and the rest of the world saw in the immediate wake of the initial euro zone crisis, the euro zone and world economy would almost certainly be much better off today if the central bankers had simply allowed the system to collapse. (This assumes that they are as competent as the economic policymakers in Argentina.)

In this sense, the heroes in Irwin's book can be seen as saving the bankers, who would have been wiped out in a financial collapse, but not really doing much to benefit the rest of society.