Forgive me for not looking at Chrome's source code on this, but I'm going to go ahead and assume that Chrome doesn't encrypt the passwords on the disk. You can easily do better than this while maintaining all of your current functionality.

On my system, I have installed scrypt and use it as a password management tool. When I need a password, I simply run a shell script I created, type my master password, and the password I'm searching for is placed in my clipboard.

Sure, I could write an extension to do this and I really should be concerned with the security of the clipboard implementation... but, those are fairly trivial (I do flush my clipboard buffer when I'm done).

This would be a simple solution for Chrome, actually. You already have all of the works for managing passwords implemented. All you need to do is add in the decryption process and simply not log the master password.

In this way, even the root user wouldn't have access to a user's passwords (as is currently the case with Chrome).