Yep, it's the whole greatness by association thing - "Most wins in the history of college football, 11 national championships, 42 Big Ten titles, the largest stadium, Ole Number 98, blah blah blah...."
But like you say, that doesn't mean anything anymore. Since Michigan's half-title in 1997, they have .676 winning percentage, which places them 17th in the FBS. By the way, Ohio State is fourth (.777), and even Wisconsin (.706) has passed the scummers. In each of those 15 seasons, Michigan has had at least two losses, and seven times they have had four or more losses; they are looking at another 4+ loss season this year. Which means that when Michigan is at their very best, like their fluke 11-2 season in 2011, they are barely relevant on the national stage (12th in AP, 9th in BCS), and when they are at their "average" they are struggling to win nine games and play in a third-tier bowl.