It is amazing what can be accomplished by creative and driven people in an environment characterized by stable and agreed-upon rules. The financial institutions that do most of the business lending are not run by naïfs. When big, sophisticated financial firms such as Goldman Sachs or JP Morgan lend money to a business, they know what they are getting into. (Give or take a subprime mortgage derivative or two — every company is capable of making bad investments.) They know where they sit in the pecking order of creditors and what assets are in play. They have a pretty good idea of what their exposure to loss is and how much they stand to lose or recover if things go wrong — and they know this because the rules generally are clear and well-understood, with generations of precedent and established processes. Some investors even specialize in the debt and assets of companies that are in bankruptcy or on the verge of it, and these distressed-asset investors are another unappreciated part of the vast financial ecosystem that keeps business in business.
We do not have debtors’ prisons (not for business debts, anyway), and we do not maintain arrangements in which entrepreneurs are forever ruined by a business failure. Instead, we have a process that encourages risk-taking and entrepreneurship, and that allows financial institutions, lenders, and investors to make decisions in a stable policy environment under which the rights and obligations of all parties are clearly defined.