I have never been able to understand why this rule is existence.

Raiser raises 3x blinds, short stack goes all in for 3.5x blinds (not enough to make a reraise), everyone else behind all in stack is able to smooth call without fear of reraise, getting amazing odds.

This rule seems counter productive to me. Why can you not just set up a side pot for the all in shortstack, and allow action around the rest of the table to proceed as normal. It seems like a short stack can really make some money by pushing all in and getting a mass group to call behind. It just seems like an arbitrary rule that makes no sense.

its a rule per location. some allow you to keep raising not many though

Anyone who hasn't acted yet can still re-raise. Just you can't 4bet because your initial raise hasn't been re-raised fully.

I suppose you mean that the seat before the raiser can call without fear of being raised? This is because the SS's raise is treated as a call, because it isn't a full raise. If the SS would just call, obv anyone could call without the fear of being raised by the original raiser.

This is actually not an arbitrary rule, and it makes perfectly good sense. Let's play the hand out, without the shortstack.

Player A makes it $150 to go. Players C, D and E all call for $150, and the pot is $600. It is folded around, and Player A says "I raise" and makes it $1000 more. Obviously he can't do that, because nobody has raised him.

Let's now say that the shortstack (B) has exactly $150, and he calls the raise. Players C, D and E also all call, and the pot is $750. Player A again cannot raise, because he hasn't been raised.

In your scenario, Player B has $175 and figures why call if I can just put the extra $25 in. He cannot be raised, because he has no more money. Players C, D and E could call the $175 - but allowing Player A to re-raise is not good because essentially he has not been raised at all by the other players, and only minimally by Player B. If Player B's raise were to be considered a legal raise, then this kind of raise would be acceptable at any time - meaning someone can bet $100 and you can "raise" him to $110. Since that isn't considered legal, then it isn't considered a legal raise in this situation.

As far as the shortstack being all-in and getting to win a lot - it is true. But he has no way of knowing that everyone else will call, and if they do, he now has to beat several players, which isn't that likely. But it could and does happen sometimes. Or he could have Player D shove all-in and get everyone else to fold, and then only have to beat one person.