This is an excellent thread - beats reading the Economist.
I agree with most of your thesis except in this particular economic downturn there are other factors that money supply management may not be able to overcome - confidence in the business system (corruption) and the ongoing threat of terrorism. The blow to confidence from corporate corruption comes at a time of low interest rates leaving the Fed. with little room to move.
Money is currently being pumped into the economy via military expenditure which must ease at some point, unless Bush really is silly enough to mount an invasion of Iraq, which when it occurs will reduce economic stimulus.
