> someone could have used this exploit to create an iFrame
But this exploit wouldn't even run. My browser would only run JS on youtube.com from external JS files. YouTube devs could put <script> within their php pages and it would do nothing, let alone random users putting <script> tags in comments. Only way to run ANY JS on youtube.com would be to load an external .js file. If this meta-tag was present, you cannot load an external JS file unless it was defined in the <head>. I really fail to see a way to break out of this shell. Adding a <script>, <meta>, <link>, <head> tag below the initial <head></head> would not work if this mode was turned on. Well-designed sites don't add meta/link tags outside of the <head> anyway. So I don't think it is asking for too much.
> If someone figures out how to break the character escape jail
I agree but that is almost certainly preventable. Right now, JS can be introduced via so many ways (<script>, on-events, javascript:) and web devs have to protect against all of them. I remember in one of the MySpace XSS attacks, IE allowed "<scri\npt>" to execute despite the new-line. Browsers will look for string <noscript_within> as start and </noscript_within> as end. So will web-devs. No partial-lines, no attributes, no nothing. RegEx doesn't fail.