It’s baaack. I told you so.

Washington is not going to stop with the bailout approach because the entire financial services sector — minus heroic BB&T chief John Allison — and all of the bankers’ lobbyists are clamoring for it. The only question is how to sneak it past an outraged public.

Senate leaders have hit upon what they believe is the “brilliant” approach to stuff Alternative Minimum Tax relief in the package in order to appeal to House Republicans. This is the yummy sausage from the congressional grinder approach. John McCain thinks if we call it a “rescue” not a “bailout” that’ll fool cool John Q. Mainstreet. I still think the missing ingredient is throwing Secretary Paulson over the side and putting a new face on the package, but we’ll see what happens the rest of the week.

Meanwhile, Nobel Prize winner Edmund Phelps has put into words the dim notion I have struggled to put together the past few days. Namely, that the old system is gone. There will be no more lending without regard to ability to pay, no more slicing a mortgage or business loan into a billion parts and “trading” those derivatives in order to book phantom revenue. Done. Phelps explains in today’s Wall Street Journal:

What has occurred is not just an old-fashioned banking crisis but also a banking scandal. Most of the big banks were shot through with short-termism, deceptive practices and self-dealing. We must institute basic changes in corporate governance and in management practice to restore responsibility and honesty for the sake of the economy and for the self-respect of the country.

We also need to return investment banking to its roots. There is more to the influence of the financial sector than merely its effects when it goes off the rails. The financial system is not a sort of circulatory system that passively carries fresh saving to the places in the economic body that demand the greatest investing — as if guided by some “invisible hand.” Judgment and vision — of bankers, fund managers, angel investors and the rest — matter hugely. So do the distortions, the limits and the license created by the regulatory system and the moral climate. To prosper and advance, the American business sector is going to need a financial system oriented toward business, not “home ownership.”

Ah, someone said scandal. This is the primary political impediment to getting a plan out of DC. The public knows something was foul, the bankers are still in denial.

So much in denial that the obvious route of using to the FDIC to shutter and merge bad banks is getting pushed to the side in favor of “rescue.” All bankers want from the FDIC is a hike in the federal deposit insurance number from $100K to $250K, evidence that Citi may fear that WB’s high-wealth customers will bolt absent the change. That and still solvent, smaller banks want in the on the government guarantee free-ride. Ugly.

Bonus Observation: Caught Wachovia chief economist John Silvia telling Fox Charlotte last night that, “Charlotte’s confidence is being tested.” Silvia is a smart guy, talked to him quite a bit back in DC doing the Fed watch thing, but his relative lack of Charlotte-centric experience shows here. Charlotte has never had confidence. In fact, its civic character has been marked by insecurity and a penchant for sizzle over steak. The one good thing that might come from the current upheaval is a QC more focused on day-to-day reality, not selling the next big deal.