I, too, adore the Cheese episode.
Mac's such a nice little boy so why on earth would he come up with such a horrible imaginary friend?
This is an interesting quandry.
Bloo was designed specifically to deal with Terrence. Mac's only eight - I doubt he's had much experience with power besides his brother. He needed someone who could stand up to Terrence. Apparently, this would involve a meaner streak and a great deal of self-confidence. Someone so self-involved won't worry about getting hurt, because they can't envision anything bad happening to them.
Bloo was also designed to be Mac's friend. When it's just Mac and Bloo, Bloo's actually pretty decent - the pair build go-karts, try to break world records, typical eight-year-old stuff.
I think the problem is Bloo is used to all the attention on him, whether he's outsmarting the bully or just playing with his kid. At Foster's, Terrence is mostly out of the picture, and Mac is only there a few hours a day. Bloo's two purposes often go unfufilled, leaving him with a lot of unspent energy. Plus, Bloo realizes he is not the only imaginary friend in the universe. He response to this is hatching crazy, selfish schemes, trying to "reclaim" his place as "The Best Friend in the world."
Do I like that he's so selfish? Not most of the time.
Do I understand why he acts that way? Sure, now that I think about it. He's very much like an only child suddenly thrust into a group situation. Bloo makes an interesting contrast to Mac and the rest of the Friends. Besides, he provides much of the show's antagonism.
It will be interesting to see of Bloo grows past this stage.
I think a friend like Eduardo would have fit him better; intimidating to look at so his brother might keep away, but a total marshmallow within.
What I think is interesting is that Mac did not imagine a big, strong being to take care of Terrence. Rather, he envisioned a small, unassuming blue blob. Bloo stands even shorter than Mac does, yet he is able to handle Terrence with ease by outsmarting him.