In libertarian circles there's been more than a little talk about where to go after abandoning the Republican Party. Some will vote for the Libertarian Party of course, though many won't. Some won't vote at all, disgusted with all of the ballot options. Some will vote for Democrats not because they agree with their stated positions, but because they aren't Republicans, and by voting for the Dems they can punish the GOP for pulling the libertarian poles out of the party's big tent.
And then there are those considering the Democrats as an effective alternative party to the Republicans, one that might share enough common values to make it worth overlooking their overtly collective and big government tendancies (just as the Republican Party's now-dead limited government doctrine made it easier to leave with it religious wing).
Markos Moulitsas (aka Kos at the Daily Kos) made the argument in June and reiterated it in October on Cato Unbound in favor of Libertarian Democrats: Democrats who seek to maximize individual rights, but don't see the government as the only, or even the preferred solution. From a lesser of two evils stand viewpoint, he may have something -- if you're in favor of limiting government power, there's really only one party that even mumbles about that nowadays and it's not the GOP.
I'm inclined to agree with Kos, and argue that they do. Just looking among my own group of friends (an eclectic mix of political ideaologies to be sure) I can see the prototypical versions of libertarian Democrats, including myself. That's not something I'd thought I'd say two years ago (when yes, I voted for Bush), but a lot has changed since then, and not for the better.
The biggest problem with the Democrats right now is that they have no guiding vision, no message the resonates with voters on a national level. Instead they offer the same tired old liberal tirades or try to out statist the statists (as we see with Hillary Clinton). A fusion of libertarian skepticism of government and respect for property rights, mixed with traditional Democratic defense of individual social rights, with a rational, restrained argument in favor of government infrastructure improvements, could create the sort of national vision they need to return to power.
Will it happen? I'd like to think so, but I'm skeptical. It seems more likely to me that eventually the Democrats will simply implode and be replaced by a new political party. It's happened before in American history, and I wouldn't be surprised to see it happen again.