The bolded was pure hype imo. The PS2 didn't blow anything out of the water, in fact the initial PS2 games were really disappointing and it took a good year before the PS2 started kicking some ass. Dreamcast had AAA titles right at launch, Soul Calibur received numerous perfect 10s and the 2K sports series were excellent and imo better than Madden.
Graphics wise, games like Dead or Alive 2 and Soul Calibur looked every bit as good, if not better than Tekken Tag Tournament, which actually suffered from some pretty bad, or rather lack of AA, and even the revamped Dead or Alive 2: Hardcore wasn't that much of an upgrade, and in comparisons showed cleaner edges on the Dreamcast, Metropolis Street Racer demolished Ridge Racer V graphically, again the game suffered from jaggies. So it was neither power nor games demolishing anything from what I remember, it was more due to the hype, the sold potential and the DVD drive, which just like Blu-ray last gen, cemented the format.
Heck I even believe that if the Dreamcast was supported long term, visually it would still be capable of some sweet graphics that would have rivaled the PS2, and at a time where Nintendo had a more powerful GameCube, and the beast that was Xbox in terms of pure horsepower, the Dreamcast would have had a fair chance if Sega wasn't already strapped for cash after all the royal screw-ups.