The discussion has to start with a Christian definition of legalism from the perspective of a Theology of the Cross. In my youth, I was taught that "legalism" was a very bad thing. I still agree that it is, it was just wrongly defined at the time. I was warned that not only telling people what good things to do but also talking about what bad things people were doing was legalism. I believed this for a while, but later realized the last half of that equation-- silence about what bad people were doing, stemmed more from the right-libertarian works of Ayn Rand than Luther.
I didn't gain a proper understanding of legalism until I started listening to the sermons of Tullian Tchividjian. He correctly points out is that legalism is REDUCING the demands of the law to the DOABLE. It's not that the legalist gives you too many things to do, it's that the legalist reduces the full weight of demand of God's law down to a minimum standard that the legalist is comfortable with. Tullian on the other hand says Christ's demand is to be perfect. (Matt 5:48) Not, give yourself grey hairs and ulcers worrying about whether you've gone enough to deserve God's grace, but "Shut up, sit down and thank God for Jesus!"
Now on to a social question, like, for example, the treatment of Jews in Medieval Germany. It was really bad. The problem of many conservatives is to dismiss the gravity of anything that Luther or any Christian German did wrong. They shrug and say, "Luther was definitely a man of his times." In other words, "Hey, he wasn't nearly as bad as his neighbors, and his badness was merely what responsible people in his day and age did." In this view, God's only "social demand" of you is to be as responsible as your responsible neighbors.
This view in my opinion is an affront to everyone who suffered, and and affront to the idea of a just or a loving God. "Be perfect" in this view gets reduced to, "Do as the Joneses do."
What would Luther say if accused (today) of participating in an evil, God-displeasing culture, of being an intellectual architect of the 20th century Holocaust? Some conservatives may say that defending the honor of a man who came up with some very Godly theology is defending God. Some theologians of the cross may say that pointing out how bad we are only points the need for a cross. Again, I quote Luther's letterto Spalatin:
“Therefore my faithful request and admonition is that you join our company and associate with us, who are real, great, and hard-boiled sinners. You must by no means make Christ to seem paltry and trifling to us, as though He could be our Helper only when we want to be rid from imaginary, nominal, and childish sins. No, no! That would not be good for us. He must rather be a Savior and Redeemer from real, great, grievous, and damnable transgressions and iniquities, yea, from the very greatest and most shocking sins; to be brief, from all sins added together in a grand total.”
The question for us today is whether the Holocaust or any other social sin that folks are debating today are "real, great, grievous, and damnable transgressions and iniquities."