Among the 20 largest TARP recipients, median mortgage and business lending both fell by 1 percent over that span, Treasury found, while median credit card lending rose 2 percent, “reflecting greater reliance on existing credit lines by consumers.”

The findings were based on a survey of the 20 banks receiving the most federal help under the TARP, and mark the first in what will be a series of monthly reports analyzing the lending trends among bailed-out banks.

Not that those banks have been particularly forthright about where the money’s going if not toward lending. In December, The Associated Press asked the 21 top TARP recipients to specify how they’re using the funds. The AP reported Tuesday: “None would provide any specifics.”

The lack of transparency had led to charges that the banks were hoarding the TARP funds — a suspicion fueled by anecdote and outside analysis. As we wrote yesterday, there’s a great deal of temptation among TARP recipients to sit on the funding for the sake of shareholders rather than to lend it and risk the consequences of unstable markets. The Treasury’s new report confirms that was the case.

There is, however, one glimmer of hope. The Treasury report found that, while lending activity was “weak” in October and November, it picked up in December “fueled by falling mortgage interest rates.” That could spell good news for the crippled housing market — if only it would ever locate its bottom.

So much for money well spent. The story also points out, using an analysis of the banks’ financial reports, what most people have come to conclude about TARP: It doesn’t work. From the Journal:

“It has failed,” said Campbell Harvey, a finance professor at Duke University’s business school. “Basically we have dropped a huge amount of money … and we have nothing to show for what we actually wanted to happen.”

But there’s more. The government’s decision to hand over the TARP money with no conditions also added to the decreased lending, the Journal said:

The fact that loan portfolios are shrinking at many of the largest TARP recipients underscores how few strings Treasury Department officials attached to the infusions. That has made it hard to prevent banks from using the money to pay dividends, make acquisitions and fund bonuses for top executives.

President Obama has pledged to overhaul TARP. There’s a lot on the administration’s plate already, but fixing TARP is going to have to be a high priority. One lesson here is that handing money over to banks and trusting they’ll lend it out is misguided. The government acted like an irresponsible parent in failing to spell out its expectations for the money. Another is that the government also never really explained what it wanted TARP to do: Was it to ramp up lending, or to get the banks in healthier shape?

If we’re going to hand over more taxpayer money to banks, either through TARP or other kinds of lending — and it looks like we’re going to have to, given the banking industry’s poor financial shape —  we need to be clear about how the money should be used, why we’re doing it, and to provide the money in a process that is transparent enough to allow policymakers to correct problems along the way.

A basic guideline would be to take the current TARP blueprint, throw it out, and start over. Do everything the opposite of the way it’s been done so far. Anything less means more of the obvious: another failure and billions of dollars misspent.

When it seizes up, so does the rest of the economy. And that’s close to what’s happening now.

Now that we’ve said all that, let’s just come out and acknowledge that the complexities of the commercial paper market aren’t quite what people talk about over their coffee or during a break at work. You’d have to be a high-level economist to understand half of what’s going on in this crisis, and even then, those people don’t always fully get it, either.

To help, here’s This American Life, which over the weekend ran a piece explaining the mess we’re in right now, including what’s going on with the commercial paper market and how credit default swaps worked. Like an earlier story the program did on securitization of subprime mortgages, the piece explains in understandable terms why we should all be very, very nervous about the credit crunch.

I heard it in my car on Saturday and pulled over to listen to the whole thing. As one example, the story looked at commercial paper from the perspective of the pest control company Terminix, and its need for short-term debt. From the piece:

“Let’s just say you have Terminix come out and treat your house, you write a check,” [Mark Peterson, treasurer of Servicemaster] explains. “Our billing department marks your account as having been paid. What’s our cash position? Do you have money or do you need money? Today, our company, we have money.’ ”

Peterson’s company might or might not have cash money the next night. It’s no big deal — maybe it needs to buy a lot of termite poison or upgrade its fleet of termite-fighting vans. All companies move between having cash on hand and not having it every day. Some days they have extra money. Some days they need to borrow.

If you’re an ordinary consumer, you might use a credit card to bridge the gap. If you’re a gigantic company, you use the commercial paper market, a way of borrowing a lot of money.

And if suddenly you can’t borrow that money.. well. Think about that.

It’s why the Fed is considering such aggressive steps toward freeing up more money for businesses. While the stock market’s drop is cause enough for concern, the possible freezing up of the commercial paper market is probably why you really should be worried these days.