This functionality is intentional and integral to how LinuxMCE functions and works. The system 'uses' mythtv (or vdr) to provide recording (and scheduling) and livetv viewing functionality. If you wish to use mythtv standalone you should really look at the mythbuntu distribution.
OK, the "TV" button accesses live TV, fine. I choose LinuxMCE because it offers more than just MythTV and I want to make use of those capabilities.
Initially I thought that the Video GUI was pretty nice, but now that I have 100s and 100s and 100s of videos I find that it basically sucks. That's what's nice about the MythTV frontend, it nicely categorized the shows. If my daughter wanted to watch Animalia then she would move to that category and select a show, if she wanted to watch Word Girl then she would move to that category and select a show, and this was very easy for her to perform. She could quickly examine the descriptions of the shows and select one. Doing the same thing from the LinuxMCE Video GUI is very tedious.
Is the Video GUI cast in stone or can it be extended? Maybe it could make use of the categories from MythTV as well. Maybe it could display the description of a video without going to the sub-screen and then maybe the left/right buttons could move between videos so descriptions can be quickly reviewed.