I gather that Charles has adding multi-byte character reads to the tty
   system somewhere near the top of his to-do list. (sorry that sentence
   doesn't read well) Maybe this question can (has been) addressed as part
   of this change (since we can't really get multiple bytes if we don't
   have an intermediate buffer)?

It sounds to me like Gordon was referring to the case of a mid-level buffer
in the device driver getting close to full.  There's obviously already a
way for the device driver to do hardware flow control in this case, 
although there's no prescribed mechanism for asserting software flow
control.

For the case of the tty buffer filling up (which is the case I think you
are referring to), there is already code to handle both software and
hardware flow control, in ttyblock(), by using a callback to the device
driver.