If nobody could get a home loan the housing prices would drop. But, loans don't create wealth so long term would be closer to break even than you might think.
Loans absolutely can fuel wealth creation by providing the capital to make purchases that increase productivity sooner than a person could afford otherwise.
Imagine that you're a farmer and you work your land by hand, or with the assistance of animals. You don't have enough capital to buy a tractor, which is very expensive. Only by working your land for 15 years will you save up enough money to afford a tractor.
However, if you could buy a tractor, then you could substantially improve your efficiency and grow way more crops. Perhaps with a tractor, you can grow 10 times as many crops or more. Ironically, if you already owned a tractor, then you could quickly earn enough to pay for one, but without one your earnings are too small to afford one.
So, someone comes along and loans you the capital to buy a tractor. It's not a huge risk for them, because if you default, they can repossess and resell the tractor. So you take the loan for a low interest rate and buy a tractor. With the tractor, you're so much more productive that you pay off the loan within a few years. Everyone is better off, both you and the person who provided the loan.
With this effect occurring all throughout society, everyone is better off in aggregate than they would be without loans. Without a loan, you might need to save for many years; with a loan, you can front-load the productivity benefit of a capital purchase. These loans fuel wealth creation.
Loans also enable people to achieve a higher quality of living. Imagine a young working professional has a stable job and a good income. If home loans were not available, the professional might need to save for 20 or 30 years before accumulating enough funds to be able to purchase a home in cash. Because home loans are available, the professional can purchase their home much sooner in their life, and therefore enjoy the benefits of home ownership throughout their life.
A society without any loans at all is a society in which people live as paupers during their 20s and 30s, before finally accumulating enough wealth to purchase a vehicle or housing or capital in their 40s or 50s. The gap between the rich (who have inherited money) and the poor would widen vastly in such a society. Loans are a vehicle for wealth creation, a vehicle for people to better themselves.
Lastly, these types of loans are not especially risky or bad. Home loans and auto loans are responsible and relatively low risk because the property can be repossessed in the event of default; this enables lenders to offer low interest rates, such that the "cost" of the loans is not very high.
Loans are critical to an economy working. Essentially it allows capital to flow from where it isn't needed to where it is. Take that away, and you've got a 3rd world economy.
The banks should only lend money to people who would be capable of saving for a house. But if you're capable of saving for a house, and someone has money they're not using, why not use their money to buy the house and pay them back?
If every party satisfies their self-interest, their transaction creates value (which is distinct from wealth).
Financial market problems are finance problems to the extent that North Korea's nuclear tests are physics problems. The body of knowledge exists, an actor uses it.
My personal estimation is that a lot of the good things in this world exist because of fractional banking and finance and that humanity is better for it. I think we can do better, but throwing the baby out with the bathwater is a recipe for disaster.
Replace 'finance industry' with 'airline industry'. Sure, the airlines pollute, and planes crash and that's unimaginably bad. But each time a plane crashes, all the subsequent trips get safer. We're never going to make it perfect, but we can make it easier to roll the dice. And people don't fly places and engage finance for no reason - they do so to improve their lives. We should focus on improving peoples lives, whether that's making it easier for them to find a place to live or transport themselves.
The problem IMO is by adding intermediaries to a transaction you also increase costs. Society pays a massive subsidy on home loans so many of these costs are also hidden. EX: Home ownership limits mobility reducing economic growth.
What happens without loans? Well, someone with capital to give out a home loan could just as easily buy then rent out a house. This would increase the pressure on home construction industry to build things to last. Further assuming there was no tax subsidy we would reach a different equilibrium.
I don't know if this would be 'better' but it would have different costs.
If nobody could get a home loan the housing prices would drop. But, loans don't create wealth so long term would be closer to break even than you might think.