I wonder if any of the opera-oriented classical bloggers will take up a reply to this. It sounds very much like nonsense to me, but I lack the expertise in opera to make a serious rebuttal.
Basically, the argument is that contemporary opera has failed because it dramatizes reasonably contemporary true-to-life stories. Opera works when the settings and stories are mythic, but the slow pacing of characters standing there while others sing long arias doesn't work when the story is supposed to be realistic. Evidently that applies even if the story is also an out-of-the-everday lurid thriller, as in his example to hand, Picker's new Dolores Claiborne, based on the Stephen King novel.
If Fogelsong invited comments, which quite clearly he does not, I would ask him:
1) How far back are you claiming modern opera had this flaw? Do you consider Menotti's quite plainly quotidian operas of the 1940s and 50s to be failures on this account, for instance?
2) What about verismo? While often lurid and improbable, its plots are no more unrealistic, in the sense you're using the term, than Dolores Claiborne. That's why it's called "verismo." Yet these are some of the most popular operas of all time.
3) Is Die Walküre really mythic? Cannot it equally be seen as a long conversation over an adulterous love triangle?
4) Aren't there ways around this problem? A composer could write an opera in which the interactive conversations are quick exchanges - opera dialogue can move pretty fast when it needs to - or, at last resort, spoken dialogue, which is not forbidden in the opera form (see, e.g., Carmen), and have the characters express their feelings in soliloquies, rather than in long addresses to each other.