The increase in the number of unstable dogs can probably be directly attributed to the increase in the number of owners who cater to their dog's every whim. A loving home is important, don't get me wrong. But there IS such a thing as too much love. A dog needs to be treated like a dog, simple as that.
If your dog is running your household: telling you when it's time to eat, telling you when it's time to play, telling you when it's time for petting, telling you when he's ready for a walk-that's a problem.
If you're coddling your dog when he hears thunder, when a stranger approaches, etc. it just reinforces how scary the stimulus is. Often owners turn a normal cautiousness or curiousness into a full-blown fear by the petting and "it's okays" they give when a dog encounters something new. Socialization is important, but so is sensitization. A dog should be able to deal with fears normally, but many owners never give him the chance.
So, yes, temperaments are going "downhill", and most of it has nothing to do with nature, but more with (over)nuture. I think there are more dogs in this world that are unstable due to their owners than due to genetics.