Well, there's a few problems associated with extensions.
As has been noted, the first is power. Excessively long cables can cause voltage drop on the cable. This is also seen with unpowered hubs. The spec allows for some voltage drop, but not all devices properly accommodate it.
The second is excessive capacitive loading on the data lines. This distorts the data signal and can make recovery impossible. This tends to result in all sorts of intermittent problems or it just won't work at all even though the device gets power. This is the principle reason the spec disallows long cable runs and extension cables (since they can be used to create an excessively long cable run). You're usually OK as long as the total cable length does not exceed 12ft even if an extension is present, but it's technically against the spec.
You're right, USB is a terrible standard. The 5V thing is annoying, and the fact that you only get 2.5W is also annoying. It's enough to cause damage, but it's not enough to actually run anything big. It should have been limited to either ~1W (low power devices like flash drives) for safety reasons or extended to about 25W to be able to run things like hard drives, printers, scanners, etc. This is of course unrelated to the driver/software model it uses which I won't even begin to get into

About the only thing USB got right was the HID standard. It's not too bad, and it's very flexible.