Shamus, I think you need to seriously re-consider what your projecting onto Lord Of The Rings (which I will get into shortly)
For starters, any kind of side story is going to have to take certain liberties, because after all fiction tends to be very character driven, and in an epic storyline where all of the big heroes that do the important stuff are detailed, it can be tricky for other people to play around in the same world and recapture that epic feeling with new material. As such when you want to do something big an epic, like with Talion, you also have to work to some extent to explain why it wasn't a big a deal or didn't influence what was happening in the stories. Sure the character is simplistic, but in something like Lord Of The Rings you can't simply start throwing out more Princes Of Gondor or whatever especially given how the lineage works. In LoTR a lot of stuff is happening elsewhere in that world that pretty much gives you a blank slate, but if people want a LoTR game they want it to be like the stories they already know. As a result picking up with the two other wizards (the twins whose name Gandalf forgot if I remember) who went off to another continent and so on wouldn't quite satisfy everyone's cravings. Talion was a pretty good compromise overall, and likewise his power set was something that was theoretically possible within the setting and the storyline sort of explains why he wasn't exactly running around fist-bumping Aragorn.
You seem to mostly agree with that, but onto the meat of what I wanted to say, you seem to have totally forgotten what actually happened in Lord Of The Rings. To put it bluntly plenty of people were getting away with using flamboyant amounts of power without having bad things happen to them. It's just that most of this stuff all happened off scene, you only got some small tastes of what guys like Elrond were capable of, not to mention characters like Galadriel and Celeborn. The story pretty much focused on a very specific plan, which was pretty much that while the major good guys were being flashy and fighting Sauron's armies, they were going to send a team (The Fellowship) secretly behind the enemy lines to destroy the source of the bad guy's power and put an end to the threat forever. To be honest, they made it 100% clear they probably could have just flat out curb stomped Sauron like happened with Isildur and company when they took him down, the problem was doing it this way wouldn't have solved the problem, power was leaving the world, and who would be able to do it then? Don't forget they pretty much sat around and discussed giving the ring to Tom Bombordil to keep, which would have ended the entire "War Of The Ring" right then and there, the problem was that Tom would have eventually forgotten about it, had it slip away, and then in however many thousands of years they would be facing the same problems, but likely with less to work with. Tom himself is almost powerful enough to take a fully empowered Sauron head on, however it was feared Sauron would win such a battle unless "the power to defeat him lay within the earth itself". This is a key point of the story when they are strategizing. Of course given how sneaky Tom was, I always kind of felt they should have just had him dump it in the Volcano and called it a day, but they we wouldn't have had a story, even the greatest literature oftentimes has plot holes you can drive a truck through, and that's the one for this story. At any rate during the whole time the story is going on, and Bilbo and Sam are on their depressing whine-fest cross country to Mount Doom, consider that when you read what was also going on, Sauron was like losing four fingers of one of his hands (or something like that) trying to take on Galadriel and Celeborn... the good guys pretty much involved in playing Defense/Plan B while they work to end the threat for all time. Likewise while the books are short on descriptive action, it should be noted guys like Aragon are walking around with major artifacts on their hip, Aragon had Anduril which was the reforged Narsil, Narsil being the sword sufficient to strike Sauron (at full power) down and cleave the ring from his finger (albeit Isildur had other heroes of the age also fighting Sauron at the same time). It's doubtful if Anduril would have had the power to take out Sauron again, especially with less power in the age as a whole, but again that was the last ditch if the hobbits failed when Aragorn was making his doomed crusade (basically to see if the Shards Of Narsil could do what Narsil did). You didn't see Aragon going "wow, my sword is corrupting me and turning me evil" only very specific items could do that, which is why people like Borimir were caught by surprise.
At any rate the point of this rant is that yeah, some dude using powerful abilities to tear down Orcish warbands and harass Sauron does sort of fit in, it could arguably fit in as a contributing factor to some of the other battles going on where Sauron was eventually going to win, but was taking amazing amounts of damage (I believe he had 10 armies, split into two hands of five each, while they were on the verge of falling the elves were holding and doing tremendous damage). While Gandalf doesn't do much (mostly concealing his power so as to not be detected apparently), consider that "Wizards" are not the only ones using magic even if you don't see a lot of spellcasters strutting around doing their thing (but some are mentioned). Again Elrond was a part of dropping a river on ring wraiths. I'd imagine Galadriel and Celeborn were probably going good old fashioned D&D battle magic off camera, that many orcs and their supporting sorcerers probably wound up on the receiving end of some of that. A lot is implied, basically nobody ever says "and then Celeborn dropped a flaming mountain on a thousand orcs...", but then again the focus of the store is intentionally elsewhere from where stuff like that was probably happening.
As far as side stories go, it's not perfect, but it's okay. If you decided to do stuff about what was happening elsewhere, like say make a game focusing on the other big battles (other than Helm's Deep and Minas Tirith) the ones that were ongoing... it would probably involve good guys showing off a lot of crazy power, especially those that have no need to hide because they want Sauron to know where they are.
That's my opinion at any rate.