Should banks lend?

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This is the problem right now. Trying to get property values to their original state, may not be the correct way to go about things.
Personally I feel the excess lending was a mistake and allowed excess inflation, causing the situation we have now, this should not be repeated.
However, we don’t want house prices to become non existent, so I’d like banks to free up their lending criteria slightly.

Should banks lend?

Should the UK government really be encouraging households to borrow money to buy houses in the current climate? And should it be encouraging banks to lend to them as part of the latest bailout package?
Clearly there is considerable pent up demand for housing and this will grow over time. But a responsible government would surely be telling first-time buyers and others to put off their purchases. What is the sense in taking out a mortgage to pay for an asset that is declining in value by 15% a year?