Robert Higgs points out that government, including domestic non-"defense" related government, grows during a time of war, when everyone is distracted by international conflict and lines up to "support the troops."
As for his take on the current financial mess, he writes: "The administration has partially concealed the burden of its spending binge by resorting to deficit finance. The upshot, however, is that federal debt held by the public increased by 49 percent between the end of fiscal 2000 and the end of fiscal 2007―by 24 percent after adjustment for inflation. To facilitate this surge of public borrowing, the Federal Reserve engineered a 40 percent increase in the monetary base, easing credit conditions in the commercial banking sector. The real-estate bubble (now bursting) and the substantial depreciation of the dollar’s international exchange value are but two of the consequences of these reckless, war-spawned fiscal and monetary policies.
"In view of the stock market’s plunge since last October, my guess is that the current recession, in which many of the easy-credit-induced malinvestments of the past seven years are being liquidated by means of write-offs, loan defaults, bankruptcies, and other asset forfeitures, has much further to run."