He's using a bubbler, which should act as a flashback arrester. There is no flame or spark between the main tank and the bubbler, so I can't see how a flashback could blow the main tank. The hydrogen which could ignite is in the tubing leading out of the bubbler and in the trash bag. Where did you and your wife see the airtight container necessary for an explosion? I'm assuming you meant there was a danger of explosion when you stated you wouldn't want to be within a mile of his garage.
He's not compressing the hydrogen, which would run the risk of the explosion you fear. He's using it as it comes out of the hose. If a flashback happened, the flame would stop at the bubbler, unable to travel through the water and into the main tank.
The only hose that would need to be rated for lye is the one leading from the main tank to the bubbler. The hose leading from the bubbler carries hydrogen, not lye.
For safety, another bubbler/flashback arrester could be used after the bag, then change the hose coming off the main tank to one rated for lye. If the setup were used on a generator outside, any escaped hydrogen would disperse quickly.
Hydrogen is currently generated under the hoods of many vehicles via electrolysis. It works safely enough because the hydrogen is used "on the fly" rather than captured and compressed and because an engine compartment is well ventilated. This setup works no differently, aside from it being a chemical reaction instead of powered by electricity. Aside from him doing this in an enclosed garage, which is easily fixed by taking it outside, I don't see where it is dangerous. Please expand on your concerns and pinpoint the risks you see, pointing out those you see as insurmountable.