Limited companies go bankrupt all the time. Do we consider it an "ethical failure" when some VC funded company folds, leaving a whole bunch of people they owe money to with nothing?
On the other hand, governments are perceived to be reliable borrowers, so they can receive low interest rate loans and are expected to repay their debt. There is not really a way for governments to issue equity like companies, so if governments become lackadaisical about paying their debts, then we should expect their loans to become much more expensive as well, and this could aggravate the financial distress of many high indebted public entities that are already struggling to pay the bills.
For anybody who has taken a look at the balance sheets of public entities, it is shocking how poorly capitalized many of these local governments actually are, and how aggressive some of their financial assumptions are (with low interest rates and 50% of their capital held in debt, a 8% assumed rate of return is extremely aggressive, and they would need financial rock-stars to achieve this at their scale). If investors are spooked, then interest rates could spike for many other government loans, and cause contagion among local government entities that would eventually require the federal government to intervene.
Governments don't make payments at adjustable-interest rates. If sovereign borrowing rates rise, because the financial markets decide that sovereigns have a higher rate of default then they thought before, this doesn't affect outstanding debt - only the ability to get more.
It is also important to separate local governments from the sovereign federal government. The federal government is allowed to print money to cover its debts, which dramatically reduces the concern among creditors that it may default. Local governments have no such option, however; they can only address their deficit by reducing spending or raising taxes. Both options are politically unpopular (hence why most politicians do nothing and pass the buck to their successors), and may be counterproductive because the local citizens can just pack up and move if taxes are increased, or if public services deteriorate.
Edit: I forgot to mention that the most attractive way to raise government revenue is to actually attract more productive citizens to move there and increase the tax base (aka how California managed to dig itself out of its immediate financial hole). However, this is obviously very difficult to achieve in practice.
Yes, that is true. Governments typically don't pay off the principal on their loan - more specifically, as soon as the loan matures, they take out another loan.
This is not a problem if you've got some 30-year bonds maturing (As a dollar borrowed 30 years ago is trivial to pay off today), but this is a big problem if most of your debt is in the form of rolling, 1-year, or 3-year bonds.
This is still quite different from a mortgage you need to renegotiate every 5 years, or where the interest rate is pegged to prime + X%.
VCs invest in opportunity, not promises.
But regardless, you should try to make your investors whole, if at all possible. I view that as your ethical responsibility as someone who receives investment.
If I promise to pay you back a loan, it's understood that the interest rate you'll charge me is related to the risk of my defaulting and that the option exists.
This isn't usually some freak unforeseeable accident. The 2007 crisis was caused as much by people overlevering themselves to take advantage of a situation as it was by predatory lending practices and greed/fraud at the I Bank level. But people love to put all the blame on the banks, and none on themselves for not being prudent.
Then why does the borrower have moral culpability in addition to financial culpability, while the lender only takes a financial haircut.
If I take my car to a mechanic am I expected to know as much about my car as the mechanic? Do I tear down and redo/inspect any work they do to my car? If I go to a mechanic and ask them if it's okay to do something dangerous to my car and they go ahead and do it, I'd say the mechanic is way more on the hook morally than the idiot driver.
Similarly if I go and ask for a 1,000,000 USD mortgage when I'm only making $20,000 USD a year and have no savings or investments and the bank gives it me... You're saying both me and bank are on equal moral footing? You would then have to ask what incentive the bank had to give me the money. Either they are greedy and wanted to charge a super high rate or they intended to pass the buck and sell the loan which can be fraud if they lie about my credit worthiness to the next buyer of the loan.
Yes, I blame the supposed experts, not the folks they suckered.
Morality is a human defined concept. We also only seem to apply it to individuals, a company declares bankruptcy, fires a large number of employees and then rights itself society shrugs but if a person does it we cast shame on them.
Life is short, if I dig myself into a whole with the best of intentions, I am not going to spend years living a lesser life and condemning my kids to that same lesser life if there is a reset button.
I don't think that it's right for a company to do what you describe wantonly. I absolutely think we should shame companies when they mistreat people.
And what you're describing with your children is selfish, but it's an understandable selfishness - your children are of course going to be a higher priority to you than society at large, as it is with almost all parents.
Anyway, my idea about the obligations of fulfilling one's debts seems to be an unpopular one, and I'm sure I won't change anyone's mind, especially if they've chosen to take on a lot of debt themselves, so I'll stop here.