Firstly, I am just confused (though not surprised) that a tiny and tentative rise in the overnight rate can trigger wailing about the fiscal policies of a government that left office in 1984.

As far as your questions go, I am sure that the booms and bust of latin america are a fascinating area of study but they don't bear much relevance to anything going on in this country. Over time government books should roughly balance, and will (one way or the other) but surely the salient question is: why have rates been so low for so long? One answer is probably the mental hangover of the 70s and 80s left politicians incapable of seeing that deflation was the real enemy, not inflation, leaving them incapable of engaging in robust deficit spending when it would have done some good. Cental banks were left to pick up the slack with pretty poor results. As far as what would happen in another finacial crisis goes, if it was as bad as the last I would hope deficits would skyrocket, as they should...