I think supersix2 might have it right there, we all assume that the machines had complete and total control of the Matrix, but that's not true. You've got the Merv running around, the Trainman (obviously not a sanctioned program), even the Oracle was rouge, there are all of these programs running around the Matrix unknown/hidden from the machines, which means the machines did not have total control over the Matrix, which is probably why Smith was able to mess everything up the way he did.
Why didn't they just shut down the Matrix and kill Smith? Here's a thought.... The Machines weren't ready to destroy their power supply yet. The Architect mentioned that "There are levels of survival we are prepared to accept." when he was talking about Neo choosing the other door and destroying the Matrix. There's a couple of possibilities here, either the Architect was bluffing, which I doubt, or do you think that they'd calculated that if the One ever chose the other door how long they'd have before the Matrix destroyed itself.
I think that the machines had a projection of how long they would have before the Matrix destroyed itself and had contingency plans for surviving the coming power shortage/dark age, but being that they were machines I'll bet they had a fixed timeline in which to enact these contingency plans. Smith was a surprise to them, they had not calculated the possibility of him. Smith was getting ready to destroy/crash the Matrix far faster than the machines were ready for. This was why they didn't just pull the plug. They were waiting as long as possible.
Make any sense?
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