I have read your entire post and, while I disagree with a few of its conclusions and premises, must compliment you on its quality. It is refreshing to see articulate opinions.
First, what I agree with:
-Reds are way too severely punished at the moment.
-Good and neutral are having it too easy.
-Crafting t3+ enchantments is indeed a "group" effort.
-Crafting primitive weaponry and gear is trivial.
-Crafting set gear can be, sometimes, ridiculously difficult.
-A durability loss on "knocked out (fake death)".
-Masteries and your proposals to fix them.
What I disagree with:
-Crafted gear is not difficult to make.
-Rebalancing based on Karma and, especially giving good characters a free pass.
I believe that you have done a fine job explaining where we stand, where the economy is and what the fear is for the future. It seems to be something players from both sides don't always register: a game needs to have both casual PvErs and hard PvPers to have a decent economy. Its corollary: easy isn't better.
I agree with several of your propositions but, while I agree with almost all of them, feel like they sometimes do not go far enough.
To be specific:
On the issue of Karma:
Karma comes easy to those who are good characters but is hard to those who go red; recovering it, while red, exposes you for a long while: it isn't "one murder = you may die once and lose two pieces of gear" but more along the lines of "one murder and you are going to stay red for several hours at least, where you may lose multiple sets of gear". On the other hand, a good character is likely to stay good forever and would thus be never exposed to any gear loss.
In my opinion, a red character should be forced to stay red for at least two hours (of ingame time, being offline doesn't count) following his crime (which allows for revenge killings). After the hour has past, he should have two options: stay red and farm mobs to gain Karma OR go to the shrine and pay the "Temple" to absolve his sins, which brings him back to zero karma (thus neutral). The price could then be set based on his crimes; the more severe the sins, the more expensive the penance.
Moreover, I'd make it so we get more Karma from killing higher tier mobs. Not massively so but a little nudge to bring repentant Red players to higher-end areas would bring interesting potential open-world PvP scenarios.
On the issue of gear drop:
I do not believe Good characters should be entirely exempted from this. However, I do think we have the potential to make this better. Hear me out.
First, I think you are 100% correct with the "one gear drop" for Neutral characters and "1 to 2 gear drops" for Red characters. With that said, I think that we could introduce a 30% chance for Good players to drop gear. It'd reward their dedication to the "Good" play style while still presenting a certain danger and a potential reward for their enemies.
Second, I think that one good way to tackle all of the problems you mentioned (from gear drop to balancing the economy) is to introduce gear destruction. The problem with "gear drop" is that it is a nullsum when it comes to the economy; sure the dropped gear is likely to have lost some of its durability but no more so than if it had continued to be used by the same player. In my opinion, each piece of gear that drops should have a 30% chance to destroy instead: after all, a fight just occurred. It likely was brutal. It'd make it so gear doesn't always drop and successful red players just don't collect entire wardrobes. Or at least, it'd help alleviate that concern a wee bit.
General thoughts:
I believe that this "three-tiered" system is a fine one but it needs to be streamlined and equalized; there should be set weapons as well and the difference between primitive and non-primitive gear (T1 to T2) should be important The idea is that we should discourage red players, as much as possible, from going out there and do "naked kills".
I feel, personally, that T2 plate gear is in a perfect spot but this should be equalized to all types of gear; with the proper infrastructure, a solo player can relatively easily get himself two full sets of plate+weapons a day. Enchanting that gear to level 1 should possibly be made slightly easier (as you, yourself, pointed out). At this point, if the reforms proposed here were to be implemented, I could easily see a world where T2 gear becomes the norm and the bread and butter of players around. Losing it wouldn't hurt terribly and one could reasonably expect to replace lost pieces.
Everything beyond that should be difficult to get and reserved for big outings with your guild or sieges. Speaking of the latter, I will conclude my post by saying three things on sieges.
On sieges:
First, everyone should be dropping one piece of gear on death during sieges, good and red characters alike. This is a special occasion where people should feel like they can and must bring their best.
Second, until some of the most egregious issues with sieges (tp'ing through walls, flags having legit 10 HPs, etc.) are fixed, the conquest mode should be disabled as to not drive more people away from the game.
Third, a city conquest should not allow the conqueror to just outright destroy every building in five seconds flat. This absolutely destroys any and all chances for revenge or come back for the conquered, which deprives the game from precious and interesting gameplay. Instead, I believe that the newly conquered city should benefit from a three-day "no destruction of buildings" peace window after which the governor can start initiating destruction of buildings. The time required to destroy the buildings would vary based on their size and importance; a 2x2 house or a crop can easily get removed overnight but a bank, townhall or workshop should take a few days. What this would accomplish is give a chance to people to move their stuff out (and then be attacked if they don't sneak in properly) or take revenge and recapture their town before it gets razed to the ground. It also forces the conquerors to try to defend a town they likely just ravaged.
Alright. I'm done. I had not planned on adding this bit on sieges in this post but I feel it ties in with the gear drops and general balance of the economy.
The overall goal should always be to have a lively, healthy open-world economy and it is clear there are a lot of great ideas here.