Hm, I'm not sure.
Until now, it was possible to be 'allied' with all major factions at the same time - and people complained that this doesn't make sense. And they complained rightfully, IMO.
Reputation degredation solves this problem. (To answer the question, why this mechanic was introduced at all.) You can work for only one faction at a time and you should keep/improve your standing with them quite easily. The others will degrade. That's okay for me.
I agree, it would be definitely more fair towards casual players, if this degrading would hapen only during play-time. Unfortunately, ED is generally refering to real time; this is true for CGs, bullitin board missions and the main plot. Making reputation degredation game-time based would be inconsistent and not logic.
Anyway, if we look at the reputation rating, what is it good for - other than the feeling of acomplishment (which should not be underestimated, by the way)?
It mainly affects the overhauled bulletin-board missions, allowing you to accept the new and extremely well paid hight-rep missions. And here, I think, is the rep. degradation an important element of balance! There is much mony to be earned (more than currently under 1.2), but to be able to do so, the game has to be played!
There is not less money you can make, being only 'neutral'; casual gamers are not punished! But players who dedicate much time to the game are rewarded for doing so - which is a good thing in my opinion!
The degredation time is a matter of balance, of course. Maybe a longer time period migth be reasonable (without more experience with this mechanic, I don't have any base for jugement) and the speed of raising your reputation migth need to increase due to the new changes. But in general, I am not totally opposed to this change, it is not totally bonkers!