NPR's Talk of the Nation discusses the importance of fantasy in children's literature.
C.S. Lewis wrote that “once every hundred years some wiseacre gets up and tries to banish the fairy tale.” Lewis also said the best fantasy worked for young and old alike. Authors of children's fantasy examine how that holds in today's literature.
Of course fantasy was high on my list as a child. Dr. Seuss, Cinderella, Snow White, Beauty and the Beast, Peter Pan, etc. I don't actually remember my mother reading to me, though she must have, mostly because from the moment I could read, I read books all the time. Thankfully my mother didn't restrict my reading back then (there was a time, when I was a teen, that she got a little wacky over a book and took it away from me, but that's another story).
Childish fantasy graduated to fantasy novels. Mary Stewart kept me enthralled with her Merlin stories. Tolkien, Frank Herbert (more appropriately SF), Robert Jordan, David Eddings, and others I've forgotten. For a while, I sampled fantasy like some folks hit the buffets on a cruise ship. But fantasy is difficult to sustain over time. The stories begin to sound alike. Country bumpkin goes on quest, turns out to be the ONE person who can save the world/universe/whatever. Personal trauma and growth ensue. It's a wonderful formula and yet boring at the same time.
Not that there aren't writers today who are turning the old formula on its head. I'm sure there are, but I just don't feel compelled to read it anymore. Harry Potter counts as fantasy (not the traditional fantasy we usually think of, but nevertheless) and I have read some of those.
The point, however, is that fantasy is important to the growing mind. It's also important to the writerly mind. Quest patterns become embedded in our psyche, Jung's collective unconscious, and we draw on them, consciously or unconsciously, to tell our stories. Without that well of knowledge, fiction is not possible. We all have a bedrock of myth that underpins our lives. The myths are universal across cultures, though with variations. (The modern fantasy novel is engaged with exploring the quest pattern.)
If the fantasy/fairy tale was truly to be banished (and I don't think this can be done, btw), storytelling would suffer. Thankfully, fantasy–the kind that creates magic when we are kids (Santa Claus, Harry Potter, Narnia, Bilbo Baggins, the Wizard of Oz)–is alive and well, as any trip to the movie theater or the children's section of the bookstore can attest.