The morale replacement for HP works pretty well, although there are some exceptions. For example, you can jump off the top of Weathertop and fall hundreds of meters to the ground and be defeated because you were "demoralized".
If any of you all play 4E D&D, it's a similar concept.
Side note, it is also a bit weird in LOTRO when they talk about "Healing", b/c they're referring to IC healing, not morale regeneration. As such, the Loremaster is the best "Healer" as far as the lore is concerned, although they're only modest at best at doing the "healing" as defined by game conventions.