[ams6110]

I think you've hit on why so many users keep everything on the desktop. They can have files and folders there (which most people CAN understand, by the way) but they don't have to deal with or see the rest of the file system (which they will inevitably stumble into pretty quickly using Explorer (or whatever file navigator app).

[extension]

They either stumble out of the Desktop or get lost in the pollution. They download a photo and edit it in Power Goo. When they want to find it again, do they look in Desktop, Desktop\Downloads, Desktop\My Pictures, Desktop\My Documents, Desktop\My Documents\Power Goo, etc?

[ThomPete]

I think you are missing the fundamental point here.

The current file systems whether MS or OSX isn't made for the amount of files that the average person deals with today.

A better system would be to allow you to search on multiple axis. But more importantly a better system would follow what you are attempting to do and limit the option space quite significantly.