I know it's probably a sin to say this here, but I don't like knit bags either, felted or otherwise. (I do like felted slippers though)
Seems to me that leatherwork is far more appropriate for bags. Just like I feel weaving is more appropriate for scarves.
No offence to anyone, but it seems like some people would knit an entire house if they could. Not everything lends itself to knitting. My two cents.
What about knit toys, teddy bears and such. Or dog sweaters, do you have a dog? They have fur, so wool doesn’t really bother them.
How about merino wool? It's all wool and very soft so you could wear it over skin.
Merino is great for all sorts of things that touch the skin, however it is generally very expensive. I think Momma_Jo's point was that she is encouraged to do more work with 100% regular sheep's wool because it is affordable, durable and high quality, but has trouble finding projects as most knit things are generally intended to touch the skin.