People and businesses still need loans.
When my business gets a new order, and needs $200,000 loan we don't have to buy the raw material, we need short loan of 1-2 months from the bank. The bank uses your deposits to make that loan.
When my business gets a new order, and needs $200,000 loan we don't have to buy the raw material, we need short loan of 1-2 months from the bank. The bank uses your deposits to make that loan.
Point is that no one should be forced to take on risk if they are using a bank. Instead it should work like any other investment.
Those that are below $250k are taking effectively zero risk. The worst case scenario is possibly losing access to funds for one business day before the FDIC returns deposits up to the coverage limit.
This is, of course, without playing games using sweep accounts or other instruments.
That said, it's all a tradeoff. Increasing FDIC insurance coverage means decreasing the yield on savings accounts, since banks fund FDIC and wouldn't take a cut in profits for it. Not sure what the optimal outcome here really is.
FIAT currency is proped up by private bussiness banks. Only a tiny fraction of the money supply is the M1, or base money (printed by FED).
The way that banks expand the money supply is by providing the illusion that all my money is there and available while at the same time being loaned out to someone else.
Fractional reserve banking means that banks don’t have all their deposits in hand. It does not mean that they invent cash for loans.
(The distinction here is less obvious in a digital world, but it’s quite clear if you think about how it would work if physical cash was used)