Can someone with more context explain why it looks like the Rust Foundation is shooting themselves in the foot? Is there an angle to this that I am missing?
If you ask lawyers to give you the most permissive trademark policy that's still enforceable, this is what you get. Unfortunately what lawyers consider to be extremely permissive, hackers see as fatally authoritarian. It's not clear whether there's any room for compromise.
This isn't "The Rust Foundation went and Did It". AFAIK it's more like "The Project has wanted to change the trademark policy for a while (My understanding is "It's currently completely legally ambiguous despite seemingly being permissive, so it's A Problem"), and one of the explicit reasons the Rust Foundation was created was to deal with the Trademark Problem. The Project (Or at least, project leadership) were very involved in drafting the current draft policy". If project members are finding issues with the policy (And not just bugs/gotchas like "We didn't realize this would ban X crates, we're gonna fix that ASAP", but with some of the explicit goals of the Policy like what it says of commercial activities in general), then that's just showing how the current structure of The Rust Project is far from ideal. And that's generally widely known.