I know you're asking what might be going wrong here, I don't know but here's my experiences with Powermid's:

First set DOA: The pair of units were very quirky, they'd relay some remotes ok but others never. Then, almost at random, they'd relay nothing at all. In either case, the LED on the transmitter usually flashed but the flashing pattern looked very different to the LED on the sending remote control. My guess is they weren't both tuned-in to the same RF, or at least, they were only marginally tuned-in to one another.

Replacement set: Fine for a few years then the IR transmitter would start blinking its LED like crazy (like yours it seems) and remote IR control was unreliable. Turning off the transmitter made no difference. I suspect that it was picking up RF interference.

I've moved house recently and I never bothered to figure out the last problem, the family viewing habits had changed and we just stopped using the Powermids. This has got me wondering now; there were cell phone transmitter upgrades in my area at around that time, I wonder whether the transmitters, albeit on a completely different frequency, were messing with the Powermid? In RF terms, I'd always regarded them as being fairly rough-and-ready and I doubt whether they are at all selective about what they receive/relay.