Poor quality PSU or faulty ones can spike as you mention with regard to the smoke, but they can also decrease in power as they get hot and cause problems with components when they do such as last week a friend was running a gtx 570 on a 500w even though the recommended spec s 550w it had been running fine for 4 or 5 months but it suddenly kept making the monitor go on standby after like an 20 mins or so. The standby couldn't be taken off so he was left with a blank screen.
In the end we monitored the rail's and total power in general and found it was dropping low as it got hot, normally I would of thought it would of just turned itself off but that wasn't the case, it clearly allowed the computer to keep running but didn't allow the graphics card to full rail power to function properly as it got hot.
The new cooler master PSU 700w fixed the problem straight away.
There's a difference between a cheap PSU giving problems and a computer not getting enough power.
500w is enough for a 570, unless your over clocking it. For a very long time I was running 6970 on a 500w for quite a bit (Nearly a year) before I switched it out for a 7970 and picked up my 650w. The PSU will either burn out (which usually leads to other things burning out) or it'll stop other things from running I.E fans, rarely does this. Usually will just shut down the pc and not be able to turn on.