A stimulus is inevitable, though the form could have changed. If the the neoliberals are still as strong (i.e. conservatives still have power), then a stimulus would have come in the form of reduced taxes and tax credits for businesses. Maybe a conservative Congress would have been able to repeal the estate/death tax. A liberal/Keynsian response would be more along the lines of what we have seen, though less emphasis on taxes and more on automatic stabilizers and infrastrure. Stimulus is inevitable in the face of economic crisis, only the form changes.
We could see less bailouts or even no bailouts. I believe the appointment of Ben Bernanke is the key point. As a leading scholar on the Great Depression, he knew that deflation has to be avoided at all costs. Failing banks depress asset prices and stifle lending. Bernanke, just as much Paulson, got TARP passed. It was his push for unconventional measures to fight the crisis that ultimately led to the bailouts.
The easiest way to stop many of the bailouts (and really start a depression...) is to make a strict inflation hawk who doesn't consider deflation a worry the Fed chairman. Marty Feldstein was a name thrown around back in 2006 for the seat and he's pretty conservative. He definitely would not have followed the same measures Bernanke did. It is quite possible that a Fed under Feldstein would have been too concerned about possible inflation to expand the monetary base enough or give out the necessary money to keep the big banks afloat. Hell, the Feldstein Fed might not have cut the funds rate all the way to 0-.25%!
I think a quick synopsis of "no bailouts" would look something like this:
- Banks' balance sheets stay deep in the red from the toxic assets they are forced to keep.
- Even more of the mortgage back securities are sold to keep the banks solvent.
- Banks and mutual funds start to buckle under their own debt, leading to far more collapses.
- FDIC is actually called in to reimburse clients of the FDIC insured banks and eventually goes bankrupt itself.
- Congress takes too long to give more money to the FDIC and more banks go under as people feel less secure in the financial sector.
- The stock market, already weakened throughout the entire financial crisis, crashes when the FDIC announced its bankruptcy.
- Historic low stock prices, combined with even lower housing prices, lead to real deflation, which the Fed under inflation hawks is unprepared to fight.
- The Fed finally cuts the fed funds rate to under 1%, but has no more room to manouver.
- Consistent deflation, faling asset prices, a major credit crunch, a depressed stock market, and rampant unemployment make the Great Recession look more like a second Great Depression.
A shackled Fed would have less of an impact on the market, necessitating a larger role for the legislature and fiscal policy. Public works programs, a la the New Deal, would have to be passed if monetary policy fails.