This post is for rhetorical and for your own venting, right? Ok, maybe not. I'll throw out some possible answers.
Where do you compromise is a question that only you can answer. Some people don't ever compromise, while some give up everything just to be employed. I think you can find a middle ground, you probably just need to talk to some people about what they do and how they got there.
The reasonable expectation is probably that the economy will bounce back somewhat and libraries will receive more funding. What happens after that is anyone's guess. As you probably know, most libraries are eliminating positions and will probably not rehire in the same fashion. No longer are people needed to check out books, but rather operate the automated machines. Many librarians are multitasking and even shelving books. You might want to contact libraries and ask librarians what they think.
I am handling this by going to get a PhD. Although I've spent over a decade in the book industry, and have only been accepted to a MA in LIS, I will not stop there. You should find your own niche.
Will you need more school? That depends on your ultimate goal. What did you want to do, how much do you want to make, where are you willing to locate? these are all questions you need to answer yourself. Yes, some places will pay for you to get more education, especially if you work for a university library, you may be able to get tuition waiver to their program, or even another. Every company/position is different.
If you had to stay in a metro area, I think NYC is a good one. The public library system, corporations, and other resources are outstanding. But this also means more competition for jobs. I am sure it possible to be successful there, you might have to work a little harder and be a little more resourceful and determined.
Good Luck!