Can you forgive them? Can Labour summon the hard-headed political realism to make allies of the Liberal Democrats, despite visceral antipathy? Can idealistic voters forgive those once swept up in an illusion that Nick Clegg floated above the fray as a safe, clean place to entrust a vote in a wicked world?

Let's not delay long over the what-ifs and who-did-what. Suffice it to say, leading Orange Book Lib Dems on the right – Clegg, David Laws, Chris Huhne and Danny Alexander – were already planning a Lib Dem-Tory coalition: David Cameron schmoozed them before the election, while Gordon Brown just scowled. Besides, even with Brown gone, the Lib Dems would have faced similar charges of betrayal had they returned to power a party as unpopular as Labour in 2010, crashing out on 29%.

But they had other choices. Clegg played their hand singularly badly, under-estimating his power: he should have let the Tories rule hesitantly as a minority government. Clegg never realised that fear of a snap second election was far stronger in the Cameron camp, with good reason. Cameron saw he had small chance of improving his vote against any Labour leader who was not Brown.

Inside or outside coalition, Clegg could have driven a harder bargain, above all on the economy, demanding a half-speed deficit reduction budget and a stimulus for growth and jobs. But he rolled over, without even securing Cameron's pledge to support AV in the referendum. Instead, Clegg led his party into the Tory lobby on everything important, including £18bn in welfare cuts. He badly mishandled the NHS bill: victory was theirs for the taking, since Cameron would never dare call an election over a Lib Dem stand to save the NHS.

The bitter truth is that Clegg's little list of minor victories sounds flimsier each time he reads it out. His tax allowance for the lower paid doesn't begin to compensate for cuts he voted through that fall hard on those same households. Stand back and look at Cameron and George Osborne's great game – to shrink the size, scope and spending of the state. Clegg has applied no brake to the breakneck privatising and commercialisation. Above all, he has not diverted them from an armageddon austerity plan.

Lib Dems now face deserved obliteration, due to the ineptitude of leaders who have blown every chance and abandoned every principle. But Labour is making overtures, with the adept Lord Adonis sent in to wave the olive branch. There's nothing new about that, since Ed Miliband said from the start he would embrace them, whenever they were ready to think again. Some Labour triumphalists point to their 10-point lead, confident of winning outright. But others see the variables: a Lib Dem wipeout means Tories win two thirds of their seats.

If boundary changes proceed, the Tories gain significantly, while Lib Dem MPs in reconfigured seats lose their hard-earned incumbency bonus. If coalition is necessary, Labour needs to prepare the emotional and political ground. If Cameron is voted out, building a moral alliance with the people who kept the Tories in power risks looking shoddy to a disillusioned electorate.

Lib Dem MPs need a survival strategy, though strategy has not been their forte. Their great problem is this: having voted against every Liberal principle from Beveridge to Keynes, how do they manufacture a convincing great cause on which to break the coalition? In so deep in blood, from a tax bonanza for the mega-rich to cuts for disabled children, they have already tolerated every last straw.

So here is their last chance. This is what Adonis urges, along with many dissident Lib Dems: Vince Cable finally rebels against an austerity that is destroying the economy. He can reasonably claim to have given Osborne's plan A a fair chance, but with the country deep in double-dip recession, he calls for the only budget U-turn that really matters. Time for plan B and an emergency autumn budget establishing an industrial bank, infrastructure investment, house and road building and a massive jobs programme for young and old, a Keynesian resurgence. His business department has overseen a collapse in manufacturing, and he should resign to rally the centre-left of his party against a government that is wrecking any chance of restoring healthy growth.

A cynical last bid for his party's survival? Yes, but it has the merit of being the right thing to do too. Few politicians could manage contrition with Cable's conviction – he speaks human so well. The closer this break is left to the election, the more desperate it will look. Lib Dems following Cable out of government risk Cameron calling an immediate election before they elect a new leader and regroup. But Cameron is in a weakened state, waiting for economic upturn before testing the electorate. He could sail on with a minority government until the next budget, since his major state-dismantling bills are through already.

Whatever the Lib Dems do is less risky than awaiting certain annihilation if they do nothing and block their ears to their leader, a dangerous man with no future beyond 2015 and every reason to hang on to each last day on the front bench. Lib Dems who wielded a deft stiletto on two previous leaders need to get knife-sharpening again. Above all, Cable needs to find his nerve: the good of his party is, for once, aligned with the good of the country.

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• This article was amended on 6 June 2012. The original made an incorrect reference to Lord Ashcroft in the context of the alternative vote referendum. Lord Ashcroft has asked us to point out that he gave the no campaign no financial or other support.