Bank stocks rallied on Wednesday on news that the government was close to announcing the latest flick of its magic wand, a program that would that buy up banks’ toxic debt and dump it all into a government-controlled ”bad bank” for quarantine, safekeeping and burial at sea.

The fact that this was actually the discredited concept behind the original TARP program five months ago didn’t seem to bother people.

I have recommended that subscribers of my advisory services steer clear of banks for the past 20 months — ever since the hedge fund blow-up at Bear Stearns in July 2007 opened my eyes to the extent to which the financial system had been corrupted by out-of-control derivatives desks.

I truly think that the global financial system is not going to make any progress until the big banks are burnt to the ground, the dirt around their foundations removed by hazmat teams wearing protective suits, and the holes that they leave behind sterilized.

And even then, they should be left as a silent witness to the perils of total arrogance, customer indifference and greed, so that the next generation learns from the mistakes that are bound to set our generation back for another decade.

At the risk of stating the obvious, the world economic system is in a hell of a fix due to the impact of so many loans gone bad, and it’s not just because two of the biggest banks in England and the United States this week suffered another public beating.

There is simply not enough money in the world right now, and not enough can be ginned up through borrowing, to fill the holes at the bottom of the financial system that underlies world trade.

Oversold or a Long Way to Go?

At the start of January, the price to book ratio for the median bank stock was 1.2x, which was well above the bottom of 0.8x in 1990. By Friday, the median bank’s stock had fallen 30% since January 1, bringing their prices down to the 1990 trough. The bank stocks were also just as oversold on a three-month basis at the end of last week as they were in 1990, too.

However if you take the point of view that we’re in a secular bear market, rather than a cyclical one as was the case in 1990, you need to adjust book value for loss still to come. That puts price-to-book and oversold values much higher, or not nearly cheap enough yet. So any rally that may now ensue has limited upside, perhaps only to the 910 level of the S&P 500.

The politicians and bureaucrats will try to tell you that they can take care of this problem by lowering interest rates, printing cash, stuffing $100 bills in loan officers’ pockets and spending money like drunken sailors on a slate of street-patching projects grouped under the term “infrastructure.” But they are just blowing smoke and hoping that you won’t notice until at least one more election cycle goes by and they can find their own ways into private industry.

Don’t Be Too Optimistic

All that government spending can do is try to bridge the gap for a short time while they wait for the private sector — that is, consumers — to emerge from their foxholes. But if it takes too long for government spending to start, then there is simply too large an expenditure deficit to make up. All the money that the Obama Administration and Congress are about to throw at the problem, now said to be around $450 billion this year and $400 billion next year, will only provide temporary help.

I’d like you to notice that even all of the somewhat cynical plays on the spending of low-income consumers most susceptible to spending an extra $500 in immediate tax relief are in the dog house now. While retailers like Wal-Mart (WMT) and 99 Cents Store (NDN) were up last year in anticipation of the tax breaks, they’re down 13% to 19% this year.

And all those infrastructure plays that got a lot of attention after Obama was elected? They’ve hit hard times too, as you can see in the shares of construction contractors like Dycom (DY) and Jacobs Engineering (JEC), down 15%; gravel supplier Granite Construction (GVA), down 14%; road building services Astec (ASTE), -17%; and construction parts suppliers Grainger (GWW) and Black & Decker (BDK), -8%. There’s still a chance they will have one last hurrah, but the window of opportunity is closing.

In summary, I think that we will eventually beat the recession and come out of it with astonishing technical innovations, great new small businesses and optimism roaring. But for now it is my obligation to remind you that it’s not time to be wildly optimistic about asset values, because they remain under pressure.

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This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.