This would actually be an exceptionally good use-case for AI. You don't need a super-duper frontier model to download a bit of source-available code and check for suspicious signs, any cheap model would do well enough. Heck, it's effectively virus scanning, we've had that for decades.
However, the bad extension was live for ~11 hours.
https://github.com/jeanp413/open-remote-ssh
and run vscode-server inside a VM or container
I only have a single "Local Extension" and it is open-remote-ssh itself.
Of course anything you put into the container can be compromised, like git ssh keys or cloud provider keys/auth-tokens. But at least it keeps your PC from becoming a botnet and your browser credentials out of reach. If you have a Containerfile/Dockerfile with everything you need you can quickly wipe everything and re-create your dev environment from scratch (which I do every once in a while), wiping any malware you might have gotten in there.
When running inside a container you can do some nifty things like keeping root directories immutable. I have been meaning to make some user directories immutable in my container but just been too lazy to do it.