By Brian O’Connell
At first blush, the news that U.S. banks are still skittish about lending money might be considered a red flag to any economic recovery.

Make no mistake, the numbers surely attest to the fact that banks’ are throwing nickels around like manhole covers.  According to data compiled by Bloomberg, banks made syndicated loans of $79.6 billion during the first quarter of 2009. But over the same period in 2008, U.S. banks $203.2 billion loans – a 61% difference from year-to-year.

But even the 2008 numbers are pale in color compared to bank loans made in the first quarter of 2007. In that three-month period, the U.S. issued $446.4 billion in loans.

But that was 2007 and this is now. If banks are making big loans at all, they’re driving harder bargains and asking for higher rate returns on their loans. Or worse, they’re pulling credit lines to traditional customers, like home equity borrowers and small business owners, potentially putting both in a tight bind.

There’s no doubt about it, a small business owner who needs some quick cash to make payroll is a sympathetic figure, but the home equity borrower … maybe not so much.

But you really can’t blame banks for turning the money spigots off, or at least cutting down on the flow.  From a business perspective, their reluctance to lend makes sense.

First, demand for equity is not strong, as individuals and businesses alike hunker down and count their pennies. Consequently, lower loan amounts may have as much to do with reduced demand as it does a skinflint banking community.

Banks have also become wary of borrowers who do need cash. In most cases these days, only borrowers with pristine credit histories need even try to apply. But banks, by and large, are taking a big public relations hit over denying loans to people and businesses that they consider to be significant credit risks. If the banking system is to regain any equilibrium, then making loans to just anyone who “promises” to pay, as was the case for the years preceding 2007, is a trend that just had to end.

Of course, many U.S. banks received federal bailout money -- cash that came with an implicit warning that it must be used to start opening the credit lines again. Obviously, that’s not happening. A U.S. Treasury Department reports that 21 U.S. banks in an agency surveyed had received $211 billion in taxpayer money. But from January to February 2009, the same period when bailout money began hitting bank coffers, new loans actually decreased by $16 billion.

That feeds into the perception that banks that received taxpayer money are sitting on their generosity and will lend their bailout money if and when they feel like it. But with no apparent strings attached to nearly $700 billion in bailout money, best of luck in getting between a nervous bank president and his pile of taxpayer cash.

The one bright spot in bank lending these days is in the mortgage market, where low housing prices and favorable interest rates have provided a decent boost in home purchases. Both Bank of America (Stock Quote: BOA) and Wells Fargo (Stock Quote: WFC) report a 35% uptick in mortgage loans since the start of 2009.

So therein lies the secret to opening the lending lines again -- banks will only lend money where there is both a demand and a good credit risk. In the U.S. mortgage market, that’s where the bank money is headed. But as other sectors, like small business and auto loans continue to grow, demand will increase, ultimately bringing funds along for the ride.

When that happens, be alert and watch out for flying manhole covers.

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