The talking heads and politicians seem intent on making bank lending or the lack thereof the central point of any bank bailout bill. The conversation is starting to veer into the surreal as bank lending standards become confused with bank lending levels. Fortunately, there are still some sane people about and one of them wrote a particularly good opinion piece in The Wall Street Journal today.

Bert Ely suggested two things. One, the evidence suggests that banks are lending at fairly healthy rates and two, forcing them to lend is probably a bad idea.

Lost in too many discussions of the financial sector is that banks and other depository institutions account for only 22% of the credit supplied to the U.S. economy (down from 40% in 1982). “Shadow banking” — notably asset securitization and money-market mutual funds — now supplies 33% (up from 14%). Insurance companies, other financial intermediaries, nonfinancial firms and the rest of the world provide the balance.

As far as commercial banks go, Federal Reserve data released last week show that their lending increased 2.36% during the last quarter of 2008. For all of 2008, commercial-bank lending rose by $386 billion, or 5.63%, even as the economy slid into recession. Over that 12-month period, business lending jumped $152 billion, or 10.6%, real-estate loans were up $213 billion, or 5.9%, and consumer lending rose $73.5 billion, or 9%. Other categories of bank lending such as loans to farmers, broker-dealers and governments, declined $53.2 billion, or 5.4%.

Numbers are beautiful things if for no other reason than it is very difficult to spin them. Sure, some of the bank lending, particularly to businesses, took the form of draw-downs of previously committed credit facilities but even if you do net that out, the picture is not nearly so gruesome as most would like to paint it. No doubt a lot of this lending took place in the first part of the year and lending slowed down in the second half.

The crucial point that Mr. Ely makes and one that I and others have pounded on as well is that a very important piece of the financial system has been vaporized. Call it the shadow banking system or the securitization market or whatever, the absence of this pool of money is one of the primary reasons that credit has become much harder to come by. Even were it healthy, the U.S. banking system would not be able to fill the hole that has been left by the disappearance of this segment of the credit markets.

And this is where Mr. Ely’s second point applies. Forcing a bank to lend into a recessionary environment is such a simply bad idea that even a high school sophomore struggling through a first encounter with elementary economics understands the folly. As business and consumer credit degenerate prudence suggests that you tighten your lending standards. As you tighten lending standards, fewer people qualify for loans and fewer loans are made.

Despite the clamor even Washington realizes this. While they berate the banks for not lending publicly, behind the scenes bank regulators are forcing the banks to tighten their lending standards and pouring over their books with magnifying glasses. It’s a wonder that they don’t all just throw the keys to the feds and head for the beach.

Bert Ely finished his piece with a nice summation.

Bankers should always lend prudently, as they are now doing. If they are jawboned or worse by Washington into reckless lending, the U.S. will set itself up for another debt crisis, even before the present mess has been cleaned up.

It really is that simple. Loans are going to be harder to qualify for and more likely to be repaid. The best thing Washington can do is shut up.