Thanks for the effort. Another uninstall/reinstall didn't help. A reset didn't help.
I have not yet done the erase and re-install but it might still be necessary.
Guess what? If I log into the iBook with a different user name, it just works.
Yes, get your jaw back up off the floor. It is something in my user account that is causing the problem.
Many thanks to an applecare phone support tech for that suggestion.
So, for now, I am going to create a new user account for managing the iPod so I it will be useful to me for now, but if I can't figure out what is up with my user account I am still going to erase and re-install so I can ditch FileVault.
Very effing strange.
The only thing I didn't try was rolling back the iPod updater one step and renaming it to LouRox as ellem suggested (for one thing, I don't know how to roll back the iPod updater). But, even if that works, I still have the File Vault issue. I don't have enough room on the HD to just copy everything to another directory and then copy it back. Hell, that's like re-installing anyway, so I might as well just erase and re-install.
Thanks for the help! I'll let you know how it turns out...