Barack Obama and John McCain are locked in the wrong battle of words over the panic stricken American economy as it slips into recession.

They are sparring over the kind of tax relief each will deliver, incentives to save jobs and regulations to curtail the greed of investment bankers and fund managers.

Though relevant for the longer term, these are mistaken prescriptions for the next 6-8 months because the fear causing financial collapse worldwide goes beyond demand issues, the US tax system, banker’s greed or even the interbank credit freeze.

Phenomena like the drop in purchasing power that might be remedied through tax relief, and the credit crunch that might be remedied through liquidity, are the results of fear not its roots.

Were they the core drivers of fear, markets should have stabilized after the infusion of over 1.3 trillion dollars into financial institutions around the world during the last 12 months and the additional pledges of over $4 trillion made during the past two weeks. Instead, the Dow Jones and London stock market indices continue to tumble as well as most major European and Asian indices. The Dow may go through the 8,000 point floor in coming days down from over 14,000 some months ago.

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The rescue effort is massive. In the last 10 days, the European Union has promised cash infusions and loan guarantees equaling nearly 2.5 trillion dollars. The US government has also made pledges worth $2 trillion in addition to rescue packages worth nearly $1 trillion during 18 months before that.

Governments are buying partial ownership of failing banks and financial institutions, including huge mortgage lenders in the US, Britain, Germany, France, Belgium, Holland, Spain and Italy. Outside Western capitalism, the Russia and China are providing over $250 billion each to financial operators. Yet fear and panic continues in every market.

The real cause is that investors no longer trust the ability of the largest non-financial companies, which are the majority in stock market indices, to report profits instead of losses. So they fear further collapse in value. Many are selling to cut their losses while others are clearing debt by selling at any price.

Some of the best companies populating the indices, especially the American ones, face gloomy quarters not because they lack money but because their clients fear to spend.

A vicious circle is emerging in which clients are retreating because they are unsure of finding buyers for their own products and services to ensure revenue streams. If these circles of fear continue they will turn into self-fulfilling prophecies causing prolonged recession.

Consumers are also extremely cautious because they already have a huge personal debt overhang, especially in the US. The only silver lining is the rising dollar. Normally, this would be a positive sign because it would mean the entire world looks to the US as a safe haven and source of innovation and strength even when things turn bad inside America.

But this time, part of the rise is caused by large investors selling off non-dollar assets to meet dollar-denominated margin calls. A strong dollar also means the US will export less, so getting to a domestic economic upturn will take longer.

For Americans, the stronger dollar has little meaning because it does not buy more inside the US. What it does buy is more imported goods and services, but those are a very small share of the spending of most households.

The economic fear spreading through America and from it to the rest of the world cannot be remedied through electoral promises. Those promises, if honored, will be relevant in a medium to long term perspective of 14-48 months. They do not help to create the conditions needed to return short-term trust to business transactions and to investors.

In business, trust means confidence in the client’s ability to pay. That trust was decimated for many reasons but the current torrent grew from a single source, which was the discovery that millions of Americans cannot pay for their homes. Since that beginning over 18 months ago, American remedies have focused on the plight of lenders instead of the devastation facing home-owners threatened with eviction.

Irresponsibly, ordinary homes, the kind that most people buy, were allowed to fall to almost zero value in financial markets despite their intrinsic worth simply because over- indebted people could not keep up the mortgage payments. Foreclosing those loans on a huge scale was foolish because buyers held back waiting for the bottom. Then it was too late because credit disappeared. Without buyers the properties had no recoverable value.

That loss of value wiped hundreds of billions from banks and others holding paper tied to fragments of those mortgages. At the time of purchase, that paper had triple and double A rating because it was based down the line on physical assets embodied in the houses and land.

Now, the only way to rebuild the trust is to act with the highest urgency to restore financial value to the homes and save people from foreclosures. That will return the floor to the pyramid of financial transactions, which caved in suddenly when the subprime loans catastrophe spread.

Instead, people are still being berated for having borrowed too much instead of being helped to stabilize their debts. Homes are the fundamental and largest store of wealth in any country. The recurring waves of panic will not subside until monetary worth is returned to that store of value. Neither candidate is focused sufficiently on this core issue.