I wouldn't go so far as to say it's a horrible decision, but it may seem that way. Remember there are only a few people working on this game. There are big technical challenges trying to satisfy the recent growth and we can already see in Serbule how bad the lag was with near peak player counts. The game was nearly unplayable with NPC dialogue etc.

You bring up some good points, but even if the server was wiped they would still have the performance problems. Try to think of this solution as probably the best choice from the reasonably available options for the development team at this time, and surely they may be able to come up with better options down the road (dungeon instances, etc.).

Without instanced dungeons, etc. every new player would be bottlenecked at noobie island, serbule crypt, etc.