Fundamentally, kickstarter is much like patronage. You may wind up getting something fantastic by backing, but you are taking on a high level of risk of getting either nothing or something very bad. All backers need to understand this, and the only obligation (morally, I'm not even sure this could be enforced legally) is to put in a good faith effort.
With that said, I'm also comfortable saying that someone who is going beyond their obligations to make things as right as they can is doing the right thing. This is the right thing in terms of his reputation, in terms of people backing him the next time he uses kickstarter, and it is morally right in the sense that it is a good beyond what he had to do.
There may be reasons and justifications to refund backers (or even just good-heartedness), but short of a knowingly fraudulent project I do not think it can ever be "the right thing".
And I say that having put about a month of income into various crowdfunding projects (on kickstarters and other crowdfunding sites) so far: they got me excited, I'd like them to succeed, but I fully expect that some will fail (entirely) and others will yield turds or will fail to live up to expectations.
But consider the long run for the guy behind this.
Say he wants to run another project down the road. He has the negative of having failed, but he has the positive of offering people's money back. Which in most people's mind would mitigate the failure to some degree.
Does that change your view that it can never be the right thing? The backers and the project leader benefit from his stance. What makes it wrong?
On the other hand, it is unclear how backer rewards figure into the picture. Maybe he feels that since a copy of the finished game was listed as a backer reward, he owes people a refund for being unable to deliver that reward?
Doing something nice now considered "insane" and "undermining kickstarter's principles".
Oooookay then.
It is a bad idea that comes from a nice place.
I do not see how failing to cater to people who can't understand basic concepts undermines anything, or how it makes it any less of a nice gesture.
Again, kickstarter is not a store. And it's not a bank either. If somebody with an idea wants a loan, he checks in with a bank not a crowdfunding site.