As one of biggest/"smartest" technology companies in the world, they could easily have implemented this response in a way that didn't make them look such bullies.
The laws are very clearly formulated for the benefit of the major media publishers, particularly News Corp and Nine Fairfax, and it would have been trivial for Facebook to limit their ban to those platforms, and perhaps a handful of other large ones that lobbied for the law.
To be clear, I'm not normally in the faction of people hating on Facebook, and generally regard the loudest attacks on them as overblown scapegoating. But, regardless of how technically right they might be, from a PR point of view it's a losing move.
If any site of any kind publishing newsworthy content chooses to sue facebook for payment, there's nothing the Australian government can do to stop them. Also there is no way for facebook to know how he Australian government will actually choose to interpret and apply the law as regulators. They could even change the way they regulate it retroactively, that's the problem with at-will enforcement of vaguely worded laws.
My point is that Facebook's reaction is a tactical error in the PR battle. They've effectively conceded this themselves, having back-pedalled on at least some of the sites banned initially.
They could have responded in a way that won them support from the Australian populace, but instead they've made themselves seem worse than the AU government, which is quite a feat.
[1] - https://www.cnet.com/news/facebook-accidentally-blocks-own-p...
All Facebook has managed to achieve is to give the Australian government a good reason to dig in, to increase support for the new media code within Australia, and to gain the Australian government the support of various other governments internationally.
They aren't.
> It's hardly reasonable to accuse facebook of not knowing what they are doing
No, it's reasonable. This has backfired badly for Facebook. They've weakened their bargaining position.