I agree we need a better way of managing our libraries, but folders are kinda 20th Century. I'd much prefer a keyword system. I should be able to tag Resogun as SHMUP, SciFi, and Graphics, and have all of those terms appear in a filter menu, just like you filter by genre or whatever in the Store today. Filtering for SHMUP should show me Resogun and Geometry Wars, while filtering for Graphics should show me Resogun and Driveclub. Bonus points if I can filter for multiple keywords simultaneously, allowing me to see only my turn-based, sci-fi RPGs, or whatever.
Also, we should be able to get to the Filter and Sort menus with L2/R2, just like we can in the Store.
Lastly, I think devs should be able to assign their own tags to games which are then inherited locally when you install, but are still freely editable by the user. Oh, tagging should be done per-user, obviously.