Yeah, I looked at the Drupal forums, and as far as I can tell the fact that this folder has to exist, or else any attempt to change other settings will end in an error, is a known issue, and is not really a bug from their perspective. The need to give world permission to write to the folder is also a known issue, although it sounds like some people don't need to do that for some reason, maybe because of different server setups.
I saw some references to people getting by without this folder existing, but I think they were using an older version of Drupal. Generally speaking, the advice on the forum there seems to be to just set permissions on the folder to 777 and leave it that way. Now that I understand more what that means, I'm kind of surprised people seem so willing to do that.
The folder in question is used by Drupal for allowing files to be uploaded and downloaded by users through the system, and it really is necessary for that feature, although it still seems silly to me that even people who don't want to use the feature that requires the folder have to create the folder and make it writable just to get the Drupal settings page to work properly.