I always associate 'baggy clothes' with things like tracksuits and whatnot, which are the sort of stuff 'chavs' wear. Since I usually wear tight-fitting stuff anyway, like skinny-leg jeans, this won't be a problem for me. However, I respect it will be a problem for plenty of other gamers.
At the end of the day though, I don't see what's so wrong here. The technology is limited, big deal. All technology has limits in one way or another. So this is just the same as all those others. If you want to play Kinect, just make sure that you have tight-fitting clothes. I don't see why Microsoft should get even more hate just because of one limit in the technology. If they can't find a way to work around it, then people will just have to put up with it. The stuff they're doing is brand new, after all. Save the Microsoft hate for the price point.
(Note, I do like Microsoft, a lot, but I do hate the stupid pricing structure they've so greedily given Kinect...).