Why does Alabama get to sit home with munchies watching LSU play Georgia, without having to lift a finger for the rematch that's looking imminent at this point? Why does a 6-6 UCLA team with an already-fired coach get handed their division and play Oregon for the Pac-12 Championship? I'm not seriously posing those questions, but the answer is: there are always perceived "injustices" because fans are conditioned to look for them. If you instead take a step back and objectively look at the whole picture, these little issues develop as consequences of NCAA and conference regulations, as well as the BCS, over the course of months if not years. It won't matter if you fundamentally change or replace the entire system, they'll still happen. In a 120-team league, someone will always get left out of something. That's just the nature of the beast, and whining about little intangibles is a fool's errand.
Ask the SEC or Big XII teams about conference championship games and how badly those losses can sting -- they've been playing them since 1992 and 1996, respectively. For the Big Ten, it's a small price to pay considering that this new format will finally end ties for the conference title. Remember the 1990 season when there was a four-way split? If you've never seen that list before, you might want to take a look. That's what the schools, coaches, players, and fans wanted to correct. So the Big Ten finally invited another team and instituted a conference championship game to resolve these issues on the field, as it should be. If the winner of one division doesn't meet the other in regular season play (like your gripe about Michigan not playing Wisconsin), they'll meet in the CCG -- all they have to do is win their division and the system does the rest. This year, it results in a regular season rematch.
At 10-3, MSU or UW will almost certainly drop below #14 in the final BCS standings, and won't be eligible for a BCS at-large bid. All either team had to do to avoid that situation was not lose twice during the regular season. Or to really drive the point home, not lose at all. It's just that simple. Meanwhile, the conference champion advances to the Rose Bowl, and a defensive coordinator is going to have recurrent nightmares about trying to contain Oregon's offense.
Your use of "clearly superior" can only successfully describe one concrete fact: Michigan State beat Michigan head-to-head. Beyond that, it's meaningless, because it's arbitrary. Why didn't a "clearly superior" Spartan squad beat Notre Dame or Nebraska? How did the "clearly superior" Spartan defense, ranked #3 in the nation, give up 415 yards and 24 points to a hapless Minnesota team which Michigan beat 58-0? See, these are pointless types of questions and arguments people get into when they're insisting that a team's performance is static over the course of an entire season. In reality, it varies wildly, and you only get an aggregate measure at the end.
What we know, without question, is that Michigan, Michigan State, and Wisconsin each lost two road games. The only real separation is that Michigan State ended up with the best conference record, since they dropped one game to a non-conference foe. If you could replay all six of those games console-style, you'd get different opportunities, momentum shifts, and results. Each team has had its own issues, hurdles, brain farts, and injuries to overcome. "Clearly superior," as you've put it, is not only misleading, it's wishful thinking.
Big Ten conference schedules rotate, and that's nobody's fault, it's just the way the system is designed. Michigan and Wisconsin don't meet again in the regular season until 2015 due to the logistics of crossover and protected scheduling between divisions.
When the analysts and various computer ratings look at strength of schedule, Michigan gets better marks for two reasons: 1) MSU and Wisconsin both hosted a FCS team in their non-conference schedule; 2) all but one of MSU's and Wisconsin's other non-conference opponents have losing records. Ignore them (Notre Dame and NIU, respectively) and that translates into (4-19) and (4-18). Adding insult to injury, both MSU and UW had to play a (1-11) Indiana squad in conference which might as well be eleven orange cones. Meanwhile, all of Michigan's non-conference opponents posted winning records. That's why, using actual calculations - even with different weighting or slightly different criteria - Michigan's S.O.S. comes out rated above the other two, even with all those home games in Ann Arbor. You can look to experts outside the BCS entirely (like Jerry Palm) and you get the same pattern.
Where I think you're going wrong is this: you don't tally up schedule strength by trying to penalize for games that weren't played. Instead, you should assign value based on those which were. Also, your method of eyeballing schedule strength doesn't follow any system, so it too is arbitrary. If you don't want Michigan to play in a BCS game, that's fine -- say "Fuck Michigan, I hate those bastards!" instead. But there's no reason to manufacture an ad-hoc argument and pretend it can be substantiated independently.