Let me ask everyone this: What if you want to listen to the iPod and not be interupted by the phone ringing loudly or e-mails coming in? How would you do that? Hint: The current switch does this perfectly. Your solution would have us turning off multiple settings every time we wanted to do this.
The switch is working the way it was designed. It's not SUPPOSED to silence everything.
The point of the switch is to silence the things YOU can't control. For example, e-mail, phone calls, and text messages.
It still allows things that YOU initiate. For example, the iPod, YouTube, and games.
The point is that it stops surprises. It lets you consume entertainment without being interupted. Let's say you're watching a movie in a theater. The silent switch protects you from annoying others when you get a phone call. It does NOT protect you if you take out the iPhone and start playing a game. Frankly, that choice is up to you, you shouldn't need a switch to stop you from doing that.
I think the design of the switch is perfect. What you're asking for (silent games) can be achieved by turning down the volume on the game all the way. This gives you what you want while preserving the useful way that the silence switch works.
You're asking to kill a great feature just so you can avoid turning the volume down. That's too big a trade just to save you 2 seconds.
EDIT: I've been doing some testing and SOME games do lock you from going below the next-to-lowest volume. 'Galcon' and 'Cube Lite' are 2 examples I've found. That IS an issue that the game developer should fix. There's no reason for that. It is, however, a seperate issue from what was originally asked. It has nothing to do with the silence switch.
