If the game is all about morale let's just have everyone trade insults and make intimidating displays instead of actually fighting.
This is what most "combat" throughout history and around the world has been. I've discussed
realistic combat before, where I
cited a piece by Grossman on
Posturing as a Psychological Weapon:
The resistance to killing can be overcome, or at least bypassed, by a variety of techniques. One technique is to cause the enemy to run (often by getting in their flank or rear, which almost always causes a rout), and it is in the subsequent pursuit of a broken or defeated enemy that the vast majority of the killing happens.
It is widely known that most killing happens after the battle, in the pursuit phase (Clausewitz and Ardant du Picq both commented on this), and this is apparently due to two factors. First, the pursuer doesn't have to look in his victim's eyes, and it appears to be much easier to deny an opponent's humanity if you can stab or shoot them in the back and don't have to look into their eyes when you kill them. Second (and probably much more importantly), in the midbrain, during a pursuit, the opponent has changed from a fellow male engaged in a primitive, simplistic, ritualistic, head-to-head, territorial or mating battle to prey who must to be pursued, pulled down, and killed. Anyone who has ever worked with dogs understands this process: you are generally safe if you face a dog down, and you should always back away from a dog (or almost any animal) in a threatening situation because if you turn around and run you are in great danger of being viciously attacked. The same is true of soldiers in combat.
Thus one key to the battle is simply to get the enemy to run. The battlefield is truly psychological in nature, and in this realm the individual who puffs himself up the biggest, or makes the loudest noise, is most likely to win. The actual battle is, from one perspective, a process of posturing until one side or another turns and runs, and then the real killing begins. Thus posturing is critical to warfare, and victory can he achieved through superior posturing.
Bagpipes, bugles, drums, shiny armor, tall hats, chariots, elephants, and cavalry have all been factors in successful posturing (convincing oneself of one's prowess while daunting one's enemy), but, ultimately, gunpowder proved to be the ultimate posturing tool. For example, the long bow was significantly more accurate and had a far greater rate of fire and a much greater accurate range than the muzzle-loading muskets used up to the early part of the American Civil War. Furthermore, the long bow did not need the industrial base (iron and gunpowder) required by muskets, and the training of a long bowman was not really all that difficult.
Thus, mechanically speaking there are few reasons why there should not have been regiments of long bowmen at Waterloo and the 1st Bull Run cutting vast swaths through the enemy. [Similarly there were highly efficient, air-pressure-powered weapons available as early as the Napoleonic era (similar to modern paintball guns), which had a far higher firing rate than the muskets of that era, but were never used.] But it must be constantly remembered that, to paraphrase Napoleon, in war, psychological factors are three times more important than mechanical factors. The reality is that, on the battlefield, if you are going "doink, doink," no matter how effectively, and the enemy is going "BANG!, BANG!," no matter how ineffectively, ultimately the "doinkers" lose. This phenomenon helps explain the effectiveness of high-noise-producing weapons ranging from Gustavus Adolphus' small, mobile cannons assigned to infantry units to the U.S. Army's M-60 machine gun in Vietnam, which fired large, very loud, 7.62-mm ammunition at a slow rate of fire vs the M-16's smaller (and comparatively much less noisy) 5.56-mm ammunition firing at a rapid rate of fire. (Note that both the machine gun and the cannon are also crew-served weapons, which is a key factor to be addressed shortly.)
Let's reduce the most popular RPG to grade school name calling. That's a great way to suck the excitement and drama from the game. That is not a game I want to be part of.
A lot of adventure fiction -- from ancient epic poems to 20th-century samurai films -- emphasizes intimidation and posturing, whether via loud bragging or a silent stare-down. It definitely has its place in a "combat"-oriented game.
That said, I don't think physical injuries and fear should necessarily share the same mechanic. At the very least, we should stop calling them "hit" points, and we should divorce them from "hitting," if anything intimidating does "damage".
Thats why I like to think of hp as exhaustion or fatigue rather than being smacked hard. As hp are lost, more energy is lost avoiding a deadly strike. 
