from my understanding the cloudproxy supports multiple instances
Ah yes you are correct, you should be able to proxy two instances with a single cloud_sql_proxy
Next thing I would try is to swap the order of the two instances, so in your example make "instance connection name 2" the first argument so it receives connections through localhost:5432. If you can connect to instance 1 but cannot connect to instance 2 in that case, that suggests the problem is with the DB.