First, and less importantly, I think "dire hypothetical" is a bad phrase for the Baby Hitler thought experiment. I suspect dire is used as a synonym for "presaging" rather than "extreme". The only point of the Baby Hitler example is to examine the philosophy under entirely unrealistic circumstances: what if we had perfect knowledge about the future? It is intended to emotionally prejudice people, typically towards ends-based philosophies.
The author concedes the imaginary hypothetical, but only those hypotheticals with unreal perfect knowledge. At that point, you could say that yes, the sky is green, but only in hypothetical worlds with green skies.
As for the rest, it is essentially the classic means versus ends debate.
Punishment of wrong doing as an intrinsic good, rather than as a deterrent, should obviously preclude punishing family members- if we were to also postulate that punishing wrongdoing is good, then punishing innocence is intrinsically wrong. Punishment itself would be wrongdoing.
Basically, this boils down to a simple means versus ends debate; "preventative" punishment cares only about results, while the author only cares that the "means" (the act) punishment is morally right.