I believe Microsoft's intent is for them to save in %APPDATA%, and for backups to backup the entire 'C:/User/<user>' folder, which includes %APPDATA%, which should contain only the application data that is user specific (so you're not accidentally backing up things that can be re-created by the install anyway).
Yes, I basically agree that applications should be installing into %APPDATA%, and anything putting application data into the Documents folder (or using %APPDATA% for non-user data) is doing it wrong.
On Windows 7, Documents is itself a subfolder. I checked to see how many applications are putting stuff in the root c:/user/<user> folder. In my case, it's not many - and all but one of them are cross-platform applications that have annoyingly decided to do the Linux convention of <user home>/.application (which I think is wrong - even cross-platform apps should follow native conventions; plus even on Linux, I think the preference is to put those folders inside a .config folder, to avoid clutter in the root user folder).
Perhaps in future versions of Windows, things will be more strict with permissions that applications are allowed (in the same way that for years, they got away with writing to the Program Files application space, until that was blocked in Vista).
I agree with what you say in your rant