I know that this thread is old, but I would like to share my solution to this problem. My solution involved using an EXT3 format on the USB drive.
I have been having this same problem with my 750GB TeraStation Live HS-DH0.0TGL/R5 Firmware 2.14 and external 500GB USB Buffalo Drive HD-CE500U2. The usbdisk1 folder was recursively listed to the limit of the directory tree on the USB drive and was also found in a folder named "pictures" below a share on the TeraStation. I tried everything listed above including running Disk Management disk checks on the TeraStation and USB drive and reformatting the USB drive. I did not re-flash the TeraStation firmware nor reformat the TeraStation. For me reformatting would have been a last resort and just a potential solution.
Based up my computer experience over last three decades, I believe that there IS a problem when a directory appears recursively. Typically a problem exists in the file allocation table or directory on the drive. In the case of the TeraStation, this is an abnormal condition and can lead to various problems. For example, the TeraStation backup utility took over 15 hours to backup 45GB of my data. Clearly this is unacceptable.
These are the steps I took to resolve this problem. I backed up the data from the share named "patient" that had the "pictures" folder and then deleted that entire share. Under Disk Management --> USB Settings I removed the USB disk assignment. Then I shut down the TeraStation and physically disconnected the USB drive. I restarted the TeraStation and ran a disk check on the TeraStation RAID drives and shut the device down again. I attached the USB drive and restarted the TeraStation.
Finally, I reformatted the USB drive using the EXT3 format option rather than the XFS option. I recreated my deleted share named "patient" on the TeraStation and restored my data. The result was that the USB drive did not show a recursively repeating usbdisk1 folder. Nor could I find a "pictures" folder lurking among any of my other shares. Also the backup program now can write slightly more than 17GB per hour from the TeraStation to the USB drive.
I don't know what was causing this problem nor why a different format on the USB drive worked for me, but if using an EXT3 format is an acceptable option for you, perhaps this solution might work for you too. My backups can now run within a reasonable amount of time and I didn't have to reinitialize or reformat my TeraStation.