The "a lot of work" is one thing. The "people are assholes" is another, and is the whole reason passwords are good.
Personally, I'm very worried about "interruptions" from the internet, because I've actually, well, played games on the internet. The internet is full of lamers, dumbasses and otherwise annoying people that many people do not feel the need to deal with. If someone is just trying to play a game with a few friends, he would not want lamers joining his game, having a password feature would be very appealing to him, because then he could just play the game with his friends that he already has.
A great example of passwords done correctly would be PSO, where if you don't put in a password you will get people joining you. Those people are about a 50/50 chance of being a decent player, or a total asshole, because PSO is a popular game and any popular game attracts lamers. There are many times when I want to find new people to play with, so I take the risk and play with a password off. However, if I don't want the hassle, simply locking the game by password prevents the guessing game, and allows me to only play with the people I gave the password to. Since all the people who don't know the password see is the game name, difficulty, and number and names of the players, they can't exactly find all that much about what is actually going on there unless they know the password. If they DO know the password, they can join it just like any other game, and then get into the game with the people they want to play with.
Now obviously, someone could use the password system to be an asshole to someone by doing all of the things you've described. However, that person will probably do that anyhow, he just wouldn't have access to a password, and have to do it in another mean way. I see no difference between people being a bully with a password or being a bully with a kick, or a bully with any of the other ways you can exclude people from a game. And since all someone would see of a passworded game in the master server would be a little lock and the name and information, they wouldn't have a clue that that person is being mean and excluding them unless the bully decides to talk about it somewhere else, like say, IRC. If they're being an asshole on IRC, you can easily do something about it there.
Now obviously, if it's insanely hard to do, which you mentioned, that's another problem altogether, and it's not worth slaving over it for hours to get it to work. But as a request, it's a perfectly reasonable and correct request. The implementation is the problem.
Of course, it's still useful for things like making cameras move and Sonic-only places... Heh, it'd be cool if you could somehow make it so that scripts can change skins and colors and maps and stuff even when typeing it into the console won't... Imagine the Sonic Heroes options we'd have! 
