I remember when a former colleague wanted my input on his interview question which was basically, "Write the algorithm for product recommendations." (eg, like Netflix's movie recommender.) Despite repeated warnings, he went ahead with that question only to come back and admit, "Yeah, that wasn't at all good." Imagine what the poor guy or gal on the other side of the table had to go through.
I don't know what the right answer is to interviewing, but my take is that I would prefer to work with someone who I can get along with, have real human conversations, and become good collaborators -- even if they're not ace coders. That measurement seems glaringly missing from too many interviews.