Has Draghi sapped central bank super powers?

Global sharemarkets witnessed a brutal sell-off overnight, as investors began to question whether the world's two most powerful central bankers – Ben Bernanke and Mario Draghi – are indeed the economic superheroes they've been cracked up to be.

Investors started to get testy on Wednesday, when Ben Bernanke, the boss of the powerful US central bank, failed to deliver a fresh round of stimulus to kick-start the ailing economy. But Bernanke at least managed to read market psychology correctly. He placated investors with the promise that the US central bank would "closely monitor” the economy, and would "provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions”.

As a result, disgruntled investors – who had been looking for a fresh round of bond buying, dubbed QE3 – could at least console themselves with the idea that it was on the way.

But when Mario Draghi, the boss of the European Central Bank, tried the same trick overnight, it backfired badly. Financial markets were sent reeling overnight after Draghi indicated that the ECB "may consider” buying the bonds of countries such as Spain and Italy, but only as part of a concerted campaign involving Europe's bailout funds.

Investor disappointment with Draghi was palpable. Spanish 10-year bond yields again climbed over the critical 7 per cent level – generally considered unsustainable – while Italy's long-term bond yields jumped to 6.33 per cent. Spain's sharemarket slumped by 5.2 per cent lower, while Italy's share market finished 4.6 per cent lower.

Investors were quick to realise that Draghi's ECB rescue plan involved lengthy delays. The eurozone's bailout fund will inevitably impose tough conditions on Italy and Spain (inevitably further budget cuts and tough economic reforms) in exchange for buying their bonds. And Rome and Madrid have shown they're in no hurry to accept such conditions.

What's more Draghi's vague promise that the ECB would intervene to counter the "exceptionally high” risk premiums faced by countries such as Italy and Spain failed to reassure investors who wanted more guidance on how many hundreds of billions of euros the ECB planned on spending. After all, the ECB has already spent €212 billion buying up the bonds of debt-laden eurozone countries, without producing a lasting drop in interest rates.

Many analysts lashed Draghi for his poor understanding of market psychology – particularly after he raised expectations to fever pitch last week with his promise to do "whatever it takes" to save the euro. It was, they concluded, yet another example of European officials undermining their credibility by making grand promises, and then failing to deliver.

But others argue that both Draghi and Bernanke – who both hold PhDs from the Massachusetts Institute of Technology – are trapped in a similar plight. Investors have turned to them in the desperate hope that they will be able to rescue Europe and the US from economic misery, but both have found that their crisis-fighting powers have largely stopped working.

Both central bankers forced interest rates down to historically low levels, without reigniting a strong recovery. As a result, they have one major option left – buying large amounts of debt from private investors.

Bernanke knows that a third round of quantitative easing – dubbed QE3 – will do little to boost the economy at a time when consumers are too anxious about their jobs to spend, and when businesses are too worried about their future sales to hire new workers. Even worse, QE3 will likely push up the prices of commodities such as oil. And when consumers have to pay more to heat their houses or fill up their petrol tanks, they'll cut back spending on non-essential items even further, while higher petrol prices will squeeze the profit margins of small and medium-sized US companies even tighter. Despite this, market expectations will inevitably compel him to launch a new round of QE3 – this time targeted at buying mortgage bonds.

For Draghi, the challenges are even greater. He faces staunch opposition to his bond-buying plans from Germany's powerful Bundesbank, which points out that the ECB is over-stepping its mandate when it hoovers up the bonds of debt-laden eurozone countries. And markets are becoming increasingly nervous about both the size and the quality of the ECB's balance sheet, which has already ballooned to over €3 trillion.

Markets appear to be set for a turbulent period as investors start to question the crisis-fighting powers of the world's two leading economic supermen.