I guess the security hole is that “allow connecting to localhost” might sound like an innocuous permission, but it becomes increasingly risky as you run more servers on local ports that have no other protection.

The permission itself doesn’t tell you anything about what powers it might grant. You need to know how all your local processes work to determine that, and most people have no idea.

It’s too generic for users to make reasonable decisions about. And that means that servers on localhost really should have authentication. Connecting client A to server B should be explicit.