Final answer:
The inability of thousands of people to repay their loans can lead to financial stress in banks, making credit less available and possibly leading to bank failures and negative impacts on various economic sectors, as exemplified by the 2008-2009 Great Recession.
Step-by-step explanation:
If thousands of people are unable to pay their loans back, it can have severe consequences for the banking system. Banks assume that a small percentage of loans will default, but if defaults are much higher than expected, it can cause banks to experience financial stress. This decline in the value of their assets makes loans far less available, which affects the convenience and safety of transactions within the economy. Industries that rely heavily on borrowed money such as business investment, home construction, and car manufacturing may suffer greatly. An example of such a scenario is the 2008-2009 Great Recession, where the financial stress rippled through the entire economy due to a massive rate of loan defaults.
In the event of numerous defaults, banks may begin to fail. The suggestion that a bank might fail can create fear and uncertainty, leading to depositors withdrawing their money in a phenomenon known as a 'bank run'. If this happens on a large scale, banks may not be able to meet the withdrawal demands, resulting in actual bank failures.
For smaller banks especially, such as those that had lent money to farmers who then faced foreclosure, the end result was often closure. The federal government may intervene, but for many banks, closure is the final outcome.