He really is being unfair to her. Maybe Iomedae the goddess doesn't care if her people or anyone else's are free, as long as Evil is defeated, but Iomedae the mortal clearly does. He knows the real reason Cheliax fell, that Asmodeus could have spent the resources of a thousand planets, that there was nothing Lastwall could have done – there's no need for him to twist the knife.
He's too powerful to afford to be this petty.
"I'm sorry. That was unfair of me. My grandfather was born after Cheliax fell, I certainly don't know if there's anything Lastwall could or should have done differently at that time. They do have records, it just hasn't been a priority for me, so this is guesswork. But if I had to guess –
– I think you made a nation which was and is very good at containing Tar-Baphon and protecting the border with Ustalav and Belkzen. They're much worse at doing anything else. It's like you said before: your people are Good, and just, and competent, and efficient and – fragile. Rigid. They have their way of doing things, which is the way you did things, with perhaps some advances in strategy and tactics. They have their leaders, who you pick. They have their Vigil over Gallowspire which they've kept for eight hundred years."
"Now, when it looked like the diabolists were really going to win the Chelish Civil War, the right thing to do would have been to break it."
(He's being careful, here. If Lastwall had pulled everything they had off Gallowspire and Ustalav and the Worldwound it still wouldn't have worked, and they'd have lost everything else in the bargain. The thing is, they couldn't possibly have known that – even Iomedae the goddess couldn't have known – and knowing what they did know, it was the only choice).
"I understand why they didn't. It would have meant risking everything they'd fought to protect. It would have meant a new kind of combat they really weren't prepared for – they train to fight demons and undead, not organized mortal armies led by devil-binders. And it very easily might not have worked. It's the most understandable mistake in the world, but I think it was a mistake – a terrible one – and it's exactly the kind of mistake I'd expect a nation to make when they've been taught for centuries that the only way to protect the world from Evil is by sticking to the narrow course laid down by someone much wiser than themselves.
I won't claim that it would have gone better if Lastwall was a republic – I agree with you that the thing you want Lastwall to be is not compatible with democratic government. But Galt was only a republic for about ten years, and in that time we reformed our army, and that army did more than anyone else's to reconquer Cheliax. After their general declared himself emperor, of course, because you're also right that freedom doesn't always make a country stronger. Still, there's a kind of strength that can't exist without it. That's what Lastwall would have needed, then."