The IPS system was in Skullgirls from the very start and Mike pimped it hard (so did I in my OP). His mistake was thinking he could be lenient on the players and it spiraled out of control when combo monsters abused it hard. Obviously he wasn't too happy and he tightened the IPS system further (among other things like scaling on grabs, assists, specials, multi hitting moves, etc) which helped a lot. The drama gauge wasn't added until much later, but by the SDE (Squigly edition) SG's combo madness was under control. That didn't stop a lot of people from continuing to talk about SG combo length like it would make minions blush, though. Alstein complains and still does, but he is one of the very few dudes who is seriously obsessed with short combos lol.
http://skullheart.com/index.php?threads/understanding-meter-scaling-with-mike-z.6839/
Right from the horse's mouth. I'm horrible at explaining minutia and such. The reason why people went for resets in early SG is different from the reason why they do so now, though. You are more or less right about why they were done before, but now resets are done for the sake of keeping drama (mvc2 undizzy) from maxing out because a combo can reach full drama and allow a green burst before the normal IPS system kicks in for it's own burst. If you know how to hit and grab reset properly you can keep applying massive reset damage to some even if they're right on the edge of bursting thanks to maxed out drama.
http://wiki.shoryuken.com/Skullgirls/Game_Systems#The_Infinite_Prevention_System
The IPS and drama systems are explained in detail here.
I'd be okay with it then.