As it stands, this is an annoying development, but I can understand that it is a necessary one.
Consider the amount of computing power that your iPhone has and consider the power required to scan through 25k songs to develop a personalized list of tracks. With iTunes match on, your iPhone 'believes' all the tracks showing in iTunes are local so to attempt a Genius list would substantially affect the 'user experience' (see Apple's reason for excluding Flash in iOS) in the shape of slow downs and possibly crashes.
Your home computer has tons of juice to handle this kind of process, so I can see why they have limited Genius use to your computer-based iTunes application. The beauty is, that it still works just fine in iTunes and that is where we can make our lists to be published to our phones.
Many people are complaining "FIX THIS". I would hazard to assume that the software developers have done this for a reason. You, as the customer, are entitled to request features, but seriously, what entitles you to demand so rudely "FIX THIS".
Perhaps the iPhone 5 will have the power for this type of action, or perhaps a workaround could involve the iPhone sending the request to a home computer to create the Genius list. Just my two cents.
For those whining so rudely, I suggest switching back to a Blackberry Bold and see the significant difference in 'user experience'.
Cheers to the developers and the constructive critics.