The partial saving grace of the existing system is that even though niche parties will never get elected, their aims can still be achieved-- enough votes to a 3rd party can scare the main players into changing their policies. No one ever won an election for women's suffrage, but the policies still got adopted.
Read Williams Hugues bio of pitt the younger to see what I mean.
This still happens, sure, but it's isolated to the parties themselves, where they are incentivized to appeal to a larger base, which minimizes factional influence from the get-go.
And yes this means that we get idiots like Wilders (and similarly idiotic parties before him, though not as popular). But on the other hand, we have a Pirate Party, an Animal Party (that I'd be more supportive of if they knew to choose their battles better, IMHO), Green Party, Socialist Party, Party for the Elderly, a couple of Christian Parties (different ones, from very strict, to relatively sane but right wing mainstream, and even a leftist one), Labour Party, Liberal (right wing conservative) Party, and many more.
It works, also because if a smaller party gets a seat, what that means is they can voice their standing points, but only really have a good chance of changing something if a larger party also picks it up. However, they are more likely to do that with a smaller party advocating it, because it's a clear signal of popular support for such a point, and it steers the discourse in a particular way.
Another plus is that the extreme crazy (often bigoted) ones, tend to blow up on themselves, because of the evaporation effect (I forget the exact term, it means that moderate people leave, and it becomes an in-fighting echo chamber), because there's always feasible alternatives to vote for, so you don't end up with two parties that are really not representative of whoever would vote for them because it's the "lesser of two evils" (or worse, I've heard some people word it recently as "the equivalent of two evils").
They told a story about Democrats in one state putting up a (national) candidate for the House with a poor environmental record. Republicans in that district consistently got 45% of the vote. The environmentalists went Green Party that year, and the Republican candidate won with the usual 45%. Two years later, the Democrats learned their lesson and picked a strong environmentalist candidate. The Republican got his 45% again and the Democrat won handily.
To use this strategy you have to be willing to put up with some short-term pain, but if you're successful once you'll be in a strong negotiating position for a good while to come. The voters with power are single-issue voters willing to switch parties.
I won't be holding my breath for Congress to vote itself less power.