What makes you think pardoning Libby would make for bad politics from the GOP point of view? It wouldn't cost them any votes from conservative Democrats or the vast majority of Republicans. It also wouldn't be any serious motivator for more progressives to come out and vote.
Indeed, we've seen the White House pull off what in previous Administrations with a real press corp would have resulted in serious poltiical damage, and emerge with barely a scratch and more ironclad support from their base. Torture, a gulag, NSA spying on Americans, they would have lynched Bill Clinton for less. Why not just pardon Libby and dare the opposition and the press to do something about it?
My answer to that is that we can reasonably deduce the White House is afraid to because THEY believe it is bad politics.
First, If it's not bad politics, why not do it now, before more of the information collected in the Grand Jury process is released to the public? Remember, despite the grotesque leaking of Ken Starr, Grand Jury information is secret. FitzGerald has been meticulous in observing the rules of Grand Jury secrecy. He has been sitting on a powder keg of information about the effort to out Plame. That information has been dribbling out to the public and the media gradually in response to filings that Libby's lawyers are making. None of those revelations are helping the White House. A pardon would end the proceedings and likely prevent that information from making it to the light of day.
Also, by pardoning Libby and Rove the White House can prevent Fitz from doing what he is likely doing now, extracting cooperation from Rove to go after Bigger fish. Without a doubt, the flipping of Rove or Libby is the biggest fear for their superiors and any other players who are now well concealed behind the redoubt of national security secrecy laws.
It seems to me the White House does not agree with your assessment, and I think that's based on the polling they are doing identified why the President's poll numbers are in the crapper, the growing belief in the electorate the Presdient is not credible. One of the Presidents great strengths politically, perhaps his greatest, is the perception he is a straight up guy. Absurd perhaps, but that seems to be what attracts voters beyond his core base of ankle biters. That strength appears to be eroded by the disconnect of his public statements and actions from what people are seeing with their own eyes in the papers and on TV. Pardoning Libby and Rove would likely be the final straw for a host of voters he pulled over to his side since 9/11. They must staunch the bleeding on this.
I would bet this Providers cache of quatloos the White House has polled extensively on pardons for Libby and Rove. I doubt the numbers are very good. It appears that the risks associated with a pardon are high enough to be worth riding out Libby's trial and possibly a Rove indictment and all the possible revelations that wil come as Fitz shows his cards. In fact, they need to know what those cards are desperately. What does the prosecutor have? Who is his real target? FitzGeralds indictment soley on perjury and false statements was a tactical masterstroke from a legal standpoint in my laymans opinion. Their efforts to find out what he has in the ammo barrel is being stymied. I would submit it is scaring the hell out of them. Ending this whole process is in their best interest in the long run if they cannot discren more about what FitzGerald has. And a pardon is way better than trying to pull off a Saturday night massacre.
This is a lenghty chain of reasoning, but I think it is plausible to assume that the White House would rather pardon sooner rather than later. That is why I think a pardon will have to happen much later, likely during the usual pardon season at the end of the term.
And in that light, the larger cabal is concerned because the President's weakened position limits the options on keeping FitzGerald at bay. I think he is still far away from cracking the creamy center of the real culprits on the Iraq psyop, but armed with a grand jury he could get closer than virtually anyone else. I cannot imagine they will not avail themselves of any weapon to blow up his investigation.