Bank Rescue? What Bank Rescue?

This post first appeared on Minyanville.

In a move reminiscent of John McCain’s suspension of his campaign to return to Washington for the vote on the first bailout, Barack Obama is putting the latest iteration of a bank-rescue package on hold while he addresses the economy.

So as not to distract Congress from imminent debate on the $800 billion economic stimulus package, newly minted Treasury Secretary Timothy Geithner delayed a speech outlining his bailout plan for the financial markets till tomorrow.

Details about the latest initiative are still cloudy, but over the weekend, reports by both Bloomberg and the New York Times focused on difficulties pricing illiquid, toxic assets, which seem to be new scheme’s the biggest sticking point.

Banks, laden with hard to price and impossible to sell assets, can’t make new loans since any fresh capital they receive is simply eaten up by mounting losses. And while big lenders like Wells Fargo (WFC) and JPMorgan (JPM) would love to unload troubled assets onto the government above their market price, politicians are wary of the negative press such a taxpayer burden would cause.

Even though the Treasury, the Federal Reserve and the FDIC have guaranteed almost half a trillion dollars in lousy debt owned by Citigroup (C) and Bank of America (BAC), bureaucrats have now found it politically expedient to play hardball with the nation’s bankers. And by hardball, I mean slow-pitch softball.

The Wall Street Journal reports President Obama’s much-heralded executive-compensation restrictions, far from squaring off with Wall Street fat cats in the UFC Octagon, is attacking Manhattan’s uber-rich with kid gloves.

Executive-pay experts and management attorneys have identified loopholes in the President’s plan, which could allow the very executives Obama means to punish to reap the very same benefits he seeks to limit. This shouldn’t come as much of a surprise, since Wall Street’s expertise lies in staying one step ahead of regulators and lawmakers, figuring how to bust new, supposedly tough rules the moment they’re announced.

As the ongoing efforts to rescue the American economy and fix the banking system roll on, the extent to which Washington is waging primarily a public relations campaign, rather than a true battle against the demons of Depression, becomes increasingly clear. Even the most well-designed stimulus takes months to filter into the economy and effect actual economic decision-making, so in the mean time politicians are focused on swaying public opinion.

Oddly, the current tactic is to frighten the public with ominous warnings about the risks of doing nothing. This is just exacerbating the contraction, as purchasing decisions are delayed for fear things may keep getting worse.

The focus on social mood rather than actual, sound policy highlights the extent to which the turmoil of the past 18 months has altered the American psyche.

Consumers are recoiling, shunning debt and extravagance for savings and thrift. Washington and Wall Street, more joined at the hip than ever, know this combination could topple their carefully constructed house of cards - economic expansion founded on unsustainable levels of debt.

We'll know more tomorrow about the latest in a string of attempts to fix our ailing financial system - unless of course something more important gets in the way.