(And before anyone emails me that the GSE equity holders are not exactly getting a good deal here, let me point out that the debt holders are. In a capitalist system, you want those extending both debt and equity finance to bear the consequences of the risks they undertake. If the taxpayer is chipping in, someone is being insulated from risk.)
Mankiw's calm is in sharp contrast to my colleage Tyler Cowen's hyperbole. Normally, I'd expect Tyler to say something like, "There's a 3% chance of a melt-down if we do nothing, and that's enough to justify a bail-out." But instead, he confidently equates doing nothing with disaster. I wonder what odds he'd give me in a conditional bet? Based on his statement, doesn't it seems fair for me to demand 10:1?
My own view: As usual, Herbert Spencer got it right: "The ultimate result of shielding men from the effects of folly, is to fill the world with fools." The U.S. has just missed a golden opportunity to credibly signal to the world for decades to come that "no guarantee" means "no guarantee." I've previously argued that economists underrate the death penalty because they aren't factoring in availability bias. I think they're underrating a "Just say no to bail-outs" policy for the same reason.