Well, apparently I've been taking the right steps all along. YAY! There's just not enough TheGreatGuero's and Gamer_152's in the world. What a shame! 
 
Anyway, uhh... I'm going to bring up another issue. One problem with playing online is that it can be difficult to tell who it is that's yelling or saying racist comments or whatever. If a lot of people keep talking at once, you really have no way of telling, unless you want to try muting suspected culprits one by one until the hate speech stops. While that can work, it's really not ideal, since you know, you're trying to play a game, and shouldn't have to resort to that. I wish there was an easier way of singling them out. Too many times, even in pre-game lobbies, I'm listening to some idiot, or several, running their mouth, and with multiple people talking, I'm unable to pinpoint which one is causing the problem, and I don't want to report an innocent person.
 
Also, sometimes I can identify who the jerk is, but am unable to report them before the game starts, and then by the time the game is finished so I can report them, I forget who it was. It does help if I mute them during the game, then I can check out my list of recently played players and see which one I muted, and from there I can report him later, but still...  the execution seems messy to me. The system could be better. I fear that either too many people don't really care enough to go through the effort or reporting users, or maybe they just don't know they can.

lol the amount of thought that is going into this has been completely overshot. i don't want to be that guy, but the mute player function is there to mute players that annoy you. a lot of people have xbox 360s. you're going to run into assholes, it's inevitable. it's not that much bother to mute a few players here and there. 
 
geez.

To be honest, I think they're funny... Thus I can't say I see the problem. Just don't take what people say so seriously, especially on the internet. It will save you a lot of grief.

I'll be honest dude; the only time I've really spent on Live has been playing games with close friends (as you well know), and that was a bit of Halo 3 and some CoD: WaW.  I tend to shy away from randomly-selected multiplayer console gaming because all the servers are hosted elsewhere, and it's not like on the PC where you can choose which server you're joining, or just call an admin over IRC when there's a troublemaker and get people kicked. 
 
That said, I had my first foray into solo, randomly-selected Splinter Cell Conviction multiplayer just this week and was paired with someone who actually knew what teamwork was and how to use silenced weapons, as opposed to the jerk-faced idiot I expected carrying a Deagle and an AK.  Prior to that the only time I had on Live was with you guys, playing against a random team from the US, and they were quite good sports as well.  So for the moment,  I can't really say anything about my personal experience on Live being sucky at all. 
 
However, your philosophy does transfer neatly onto online flash games (using Kongregate as an example here); whenever we get a troll in the room, if there's no moderator online the regulars mass mute and usually at least one of us reports the offender.  The moderators (when they're on, and not playing Runescape or Minecraft) are usually swift and just.  This is probably what Live is lacking - realtime moderators.  But you'd have to be crazy to actively sign up for a job that involved looking for troublemakers on videogames... wouldn't you?