The best explanation of the purpose of the color system I have heard is as follows. Potential suicide bombers are, by definition, not afraid of death, because they believe that their murder/suicide will bring them paradise. They are, however, terrified of being captured. This would mean an ignominous death in a jail cell of old age, and they would be denied their afterlife reward. As a result, AQ is said to be extremely skittish. If AQ believes that a plan has been exposed, they will scuttle the plan and go into hiding, sometimes for years.
The color system was designed to work in conjunction with the sort of intelligence we were getting -- where we knew from traffic analysis that an attack was likely about to be executed, but did not know the specifics. The idea was that the color level would be maintained at yellow, but when U.S. intelligence felt that an attack was imminent, but had no specifics, they would make a public announcement and raise the color level. This would, it was hoped, spook AQ enough for them to postpone or cancel the attack. Then, of course, there would be no attack, and the talk show hosts would mercilessly mock the government officials, who would have to console themselves with the knowledge that they had possibly saved hundreds or thousands of American lives, but not really knowing for sure.
The article gives no indication that the current Homeland Security understands the actual purpose of the system. They seem to be dismantling it for no other reason than that being mocked by the media rubs them the wrong way. I certainly hope that there are no more successful AQ attacks, but it is sobering to realize that the U.S. government is dismantling what may well be a very well functioning part of our national defense system because they find using it to be embarrassing.