As you allude to, the problem with direct democracy is that people are stupid. Not all people about all things, but most people about most things. The realm of human knowledge is simply too vast for anyone to have a broad command of, so we specialize. This means that, for any given issue, the vast majority of people are ignorant about its specifics. Thus we cannot expect the masses to make wise decisions about most issues. The obvious counter-argument to this is education, that educating the public on the issues at hand would lead to better decisions. However, that would fall victim to the same demagoguery and corruption that we see infecting politics today.

By way of illustration, think of an issue that you care deeply about and are well-informed on. Now ask yourself if you would trust the public at large to make policy on it. For every pg, grellas, or Schneier, you'll have far more popular Becks, Palins, and Bachmanns. Direct democracy would be inherently susceptible to such demagogues, and as such cannot be seen to be any more reliable, or likely to produce wise policy, than the current system.