Sitting in the lobby of Washington DC's Mayflower Hotel, Bob Barr nursed a grande Starbucks and shook his head at the debate a mile away on Capitol Hill.

"People are asking: What in God's name is happening to our economic structure and the economic underpinnings of our country?" he said. "How have we gotten to this point where trillions of dollars are being absolutely squandered, both currently and prospectively, on 'bail-outs' that we know aren't going to work?"

Barr was the Libertarian party's 2008 candidate for president. He entered the race in May, after trying to coax Republican iconoclast Ron Paul out of his quixotic bid against John McCain and into the small-government third party. Paul spent $35m and Barr spent $1.2m on nationwide campaigns that warned Americans that government had grown too large and invasive, that the Federal Reserve had overcooked the economy and that inflation was risking America's superpower status.

In September, the warnings of Paul and Barr seemed to come true. An economic crisis that started with the subprime market meltdown has not been slowed, in their view or in the views of most people, by the $700bn bail-out signed into law October 3. Both McCain and Barack Obama voted for it. A majority of voters said, in the election exit polls, that they opposed it. Yet Barr got only around 510,000 votes for president. If this wasn't a good time to be a libertarian politician, what would be a good time?

It's hard to say, because libertarians, like their fellow travellers in the conservative movement, are at a loss on how to move forward. The growing consensus in America is that Obama must act as boldly as Franklin Roosevelt did to save industries, restore confidence in markets and reinforce the safety net for less well-off citizens. The cover of the post-election Time magazine got literal and caricatured Obama as FDR, the steward of a New New Deal. But libertarians were not merely opposed to the New Deal. It was anathema to their beliefs. It was the antithesis, they thought, to what America stood for. "Rooseveltism, Hitlerism, Stalinism are all only local variants of the common doctrine that man has no natural rights but only such as are created for him by the state," wrote libertarian scholar Albert Jay Nock in 1937.

But modern libertarian thinkers and economists are not so dogmatic, or so reflexively anti-intervention, as Nock was. Amity Shales, an economic writer and historian who last year published a blockbuster, anti-New Deal history of the Great Depression, The Forgotten Man, has endorsed the idea of bail-out money for Wall Street, as long as it does not require management from Washington. (The current bail-out plan is a bit of a hash of both ideas.)

Megan McArdle, a libertarian editor at the Atlantic Monthly, was more conflicted. The dogmatic libertarian position on the bail-out – the one that, as it happened, Republicans in the House of Representatives held, as they shot down the first attempt at a bail-out in late September – was to oppose it. But McArdle chastised them for doing so. "I find it hard to believe that they're voting their conscience; they're voting their electoral interest in November. I hope their constituencies enjoy the bank panic."

All of this was happening as the official candidate of the Libertarian party, like previous standard-bearer Ron Paul, was denouncing the very idea of such market interference. But even libertarians who completely opposed the idea of the bail-out, and are wary of any more government interventions, split in their reactions. Scholars at the Cato Institute, the largest and most influential libertarian thinktank, bordered on buoyant when they told the Washington Post that they were ready for a real ideological battle again. Over at the Ludwig von Mises Institute, an Alabama thinktank that attacks the sellouts at Cato (the charge: they are part of a "Kochtopus" that takes money from billionaire David Koch to accommodate Washington power), pronounced the death of the American system and the "mother of all depressions" if the bail-out passed.

American liberals are divided about the new spirit of government intervention, too. Most Democrats in the House of Representatives opposed the bail-out. They, however, have reasons to be optimistic about the coming flurry of government experimentation and intervention. Libertarians like Barr are shocked, surprised and as of right now divided on how to adapt.