Why could the banks not follow that path right now (with fiat) (under regulation) ?
Bitcoin can be reliably transferred over the Internet in less than an hour. Dollar bills can't. You don't need a bank to transfer your dollar bills across the country.
Bitcoin can be kept secure with a split key, so that it requires two pieces of information to access the BTC. Half of that key can be kept by the individual and half can be kept by the financial institution. This way you can ensure that it's impossible for the financial institution to lend out your BTC without your permission. You can't do that with dollar bills.
Bitcoin can be made safer to carry in your pocket than dollar bills. You can carry it encrypted.
Bitcoin is easier to divide than dollar bills. You don't need a bank to split your two hundred dollar bills into five ones, five fives, five tens, six twenties, and two fifties. You don't need a bank to count your coins.
Most importantly, Bitcoin is decentralized. The feds can't print unlimited amounts of it. The only reason the US banking system hasn't collapsed already is that the monetary base did this:
The Bitcoin monetary base
can't do that. (If you're comparing Bitcoin to gold rather than US dollars then gold too is "decentralized". What happened to gold to keep the US banking system afloat was that the US government confiscated it. It's unlikely the US government would succeed in confiscating bitcoin, among other reasons because it's so easy to transfer across national borders.)
Could banks offer to take people's bitcoin and lend it out, using 10-1 or more leverage, and paying little to nothing in interest? They could offer it, but who's going to fall for that?
Of course it is the case that we would desire that banks "stop dabbling in so much fractional reserve gambling" - but in a free market where the banks are in competition with one another, and moreover there is a demand for cheap credit and competitive business loans to facilitate growth/expansion/enterprise - how would the introduction of BTC on its own stop the dabbling ?
A free market would in itself end fractional reserve banking. If it weren't for the bailouts, the banking system already would have collapsed.
It has been said in this thread that it is greed which drives the demand for borrowing - this might be so in many cases - but you could also say that people are driven to it by way of necessity. It just depends on how you view it.
I'd say there's not much difference between greed and necessity. They both make the world go 'round. (Note to deisik: That's a metaphor. Greed doesn't literally make the world spin on its axis. It just makes it possible for so many of us to live on this spinning planet.)
I guess what I'm saying is that I'm worried that what initially to me seemed to be a technological advance that might provide an alternative, will be instead, in the end, co- opted/comandeered to the service of capital.
Someone please tell me it isn't so
What exactly do you mean by that? Was Bitcoin built for the service of capital?