Yes, this isolation leads to dreadful results in my view, with everything being in a dead artificial space. That is the penalty for the "fix it in the mix" approach.
If recordings were laid down with a get it right the first time approach, in a pleasing acoustic environment, and laying off the dynamic compression, there would be a total rebirth of artistry and a boom in sales. This commercial sound dead end has literally killed the "golden goose" in my view.
The other issue is that omnis are in fact directional by proximity, and you get the desired result without the proximity effect of cardioid microphones. I have always vigorously limited the use of direction microphones except figure of 8 types.
I'm not sure what would be reborn. They've been recording with isolated tracks since the 1930's. It certainly isn't a new phenomenon. The major difference is that in the old days we had 2, 4 and 8 track tape recorders and today, with digital recording, we have as many tracks as we need or want.
I tend to agree with you about the limiting and compression. The record companies use it so heavy handedly because the majority of listening is done with ipods and car stereos. They need to be able to be heard above the ambient noise. There is no doubt that pop recordings these days aren't made with you and me in mind. Jazz and classical are still recorded pretty well for the most part. Recording engineers don't like all the limiting and compression either. They just provide the record companies with what they want and pay for.
I think it is fair to say that omni mics are somewhat more accurate and, certainly they don't suffer from proximity effect. However, I don't know any recording engineers who are particularly interested in accuracy and proximity effect isn't all that hard to manage. Most of them are interested in "great" sound however you want to define that. The great majority of studio recording is done with cardioid patterns mostly to enhance isolation.
If you are recording a violin sonata or an acoustic big band, then you certainly need to have enough accuracy so that the listener recognizes the sounds of the instruments. Nevertheless, these types of recordings still go through quite a bit of processing during mix down. It is the nature of the beast. Microphones don't always "hear" like we do. With sequenced music, all bets are off, as you know.
Back in the 1970's there were some people making some wonderful recordings with just a pair of mics and a two channel preamp. They connected the mic preamps directly to the master cutters and went straight to disc without any mixing at all. Some of these recordings were outstanding. Some, not so good. Today, we've eliminated all the problems related to tape recording so there really isn't any advantage to going through what those guys did in the 70's.