If you were to encrypt passwords in the cloud with a key that's stored on the device, you can't unlock the passwords on a different device (or the same device after flashing), which is the whole point of backing it up in the cloud.
If you were to encrypt them with the user's Google Accounts password, the device would need to ask for that password on every startup or store the GA password on the device at all times (the latter option is a far greater evil than the current "situation"). As long as Google is ever given the clear text password (i.e., before hashing), this would be open to interception by Google -- or infiltrators thereof.
If the GA password were to be used to authenticate in a way where Google doesn't get access to the clear text password (through digest-like authentication), a user wouldn't be able to access the backups after resetting her password. However, this method is not reliable if you don't trust Google (or its infiltrators), because Google provides the clients that would do the hashing before sending the password, so they could obtain the clear text password (by skipping the hash step, or by sending it through side channel) on any client they control such as HTTP login pages or mobile apps provided by Google.
Like all things security, it's a trade-off between security and convenience.