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Racism on Live (on any online game) is not usually legitimate bigotry of any sort. It's a bunch of adolescents trying to appear tough in an inept manner.
Maybe 5% of these kids are actually racist (or homophobic, or whatever). The rest of them are just jerking off their egos. If it's an objection to political correctness, it's only in the sense that they enjoy offending people.
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I totally agree, I think this is much more simple than the thread-creator thinks. Speaking with people you don't know and will most likely never meet makes it easier to say things that you normally wouldn't say face to face in fear of losing a friend or getting the shit kicked out of you... neither of these threats are there over XBox Live, or any other internet communication medium where you chat with people you've never met, which is why you go into any online chatroom that isn't well-moderated, and you have people begging for sex. Yes, people probably beg for sex in real life too, but its not done publicly (normally) unless you're on the internet! The consequences (if any) for speaking like this on the internet are slim, a 5 minute ip ban? Being muted? Who cares.
Jam it back in, in the dark.