The Back Story of the Flash Crash

You remember the flash crash. That’s the day in May 2010 when the Dow suddenly declined about 1000 points. The Washington Post recently ran an excerpt from a book that describes how the world’s central bankers acted behind the scenes during that period. The headline says it was “Three days that saved the world financial system.” That might be a bit of an overstatement. But it is an interesting take on what the central bankers were doing while the media talking heads and politicians were making their statements.

But in fact, what happened over three days and four nights in May 2010 is essential to understanding the economic predicament in which the world still finds itself. In that moment, the major Western central banks — and their leaders, Ben S. Bernanke of the U.S. Federal Reserve, Mervyn King of the Bank of England, and Trichet of the ECB — made a series of decisions that created the world economy we inhabit today, and likely far into the future.

Through half a decade of crisis that spanned every continent on Earth, it was this triumvirate of central bankers who responded on a scale and with a speed that presidents and parliaments could never muster. They deployed trillions of dollars, pounds and euros, often in concert, always trying to contain the damage. They made plenty of mistakes, some of them costly. But they also have kept the world from a disastrous economic collapse of the sort their predecessors had allowed eight decades earlier, setting the stage for the rise of the Nazis and World War II.