Most RPGs, MMO or otherwise, seem to have that problem. You walk into town wearing a god's skull, and people don't turn a hair. Even in less outrageous games, like Fallout for instance, you'd think people would comment on your arsenal.
A couple of towns in Fallout 2 had the random town NPCs saying different things if you were wearing a suit of powered armor (the prostitutes in New Reno being a high point). Ironically, the gun laws in FO2 were much more relaxed, such that in most towns nobody ever even noticed you walking around holding out a big-ass turbo plasma rifle. Except in NCR, where pulling out a gun in public would get you a warning, followed fairly quickly by every policeman in the city turning hostile and trying to shoot you to death. Nice touch, there.
On Oblivion: the best way I've found to walk all over everything is to get/make some stuff that has +20% chameleon bonuses on it (+30% is possible if you're high-level enough and can be bothered to farm sigilstones looking for the one specific kind that gives chameleon enchantments, and there's a ring you get for one of the daedric quests that has +35% and a +10 speed boost to boot), and wear it all at once so you have 100% chameleon. The AI more or less can't react to you at all with 100% chameleon on, so they just stand there while you whack them in the face with your daedric longsword of +20 fire damage or whatever. Sometimes they'll bring out their weapon, then put it back and say something like "hummmm. Must've just been a rat" even as you continue to pummel them mercilessly. If that's too broken for you, then consider getting a set of nice clothes and enchanting them all so that they add up to a +85 shield enchantment. You'll not only have a set of very light clothing (about 5 pounds or so, not enough to care about when you have 100 STR) that protects for as much as a full set of armor and can't be damaged (no need to carry repair hammers around! Huzzah!), but because you're not technically wearing armor you'll also have 100% spellcasting efficiency, something that can come in handy if you focus on destruction or conjuration.
Or if you have no life whatsoever, like me, you can just get every skill and stat to 100 and level up to something like 51. Or don't bother with the leveling up, because with 100 skill in everything any level 1-4 thing you come across is going to be made of wet tissue paper, whereas if you bother to go up to 51 then the lowly goblin can still present you with at least a minor challenge, especially the shamans and warlords.
Or don't bother playing the game properly at all and instead just dupe lots of watermelons or apples or other round objects on top of a large hill. Or dupe a whole big stack of books so that they explode in a pretty moving line pattern. That's a lot more fun than grinding your blade skill to 100 on a bunch of immortal scamps with an iron dagger.
