Hmmm--Sounds like you and Mr. Perfectionist have a little talking to do, Carol!
Haven't seen the picture yet--refuse to get an MSN Passport or whatever it is. As to the foot of water in the bottom, a 2" trash pump from your local rental store will make almost-immediate work of it, so that's not an obstacle to doing it right.
As I understand your proposal, it is to trench vertically through the, ummm, silt
and put in pond liner, oriented vertically, and then refill the trench.
First, I think it will be impossible to trench in a soggy dam and keep things intact. Sounds dangerous to me, and likely to collapse. Heavy equipment + shiftable land = very scary.
I'm no hydrologist but it seems to me that the rubber sheet will do nothing about the problem on the pond side, and the dam on that side will wash away fairly quickly, leaving you with a rubber sheet holding back about, oh, 200,000 gallons of water from another few feet of now-weakened red silt. Add the Oregon rains (or do you live in the east?), not to mention what if your stream takes on an unusual (say, 10-20 year rain event) flood and dumps all that water into your pond in an hour or so), and the waterward side of your dam will be undriveable--if not gone--over time. My guess is the whole dam will be gone.
The clay-filled trench, while it seems it might have a higher likelihood of success if only because it adds heft, will still permit the pondward side of the silten dam to wash out, meaning that you have about 2-3' of clay holding back that same amount of water. Now, my experience with clay is that water will wet it at least a foot or 18" from water's edge. I don't feel too good about that one, either.
I don't know enough about bentonite to know if it would seal whatever red silt is, but it seems like your dam is making like a sponge and I'd be really antsy about not addressing the structural issue.
Two thoughts. Most important, IMHO, is now that now you've got the free advice from the extension services get an opinion from the most experienced local pond builder you can find; I'd ask at a really well-established landscaper, if the extension folks won't give you a name. At least then you'll know. The last thing you want to do is spend the summer digging a trench and having the whole thing go fubar.
The other is that you might look into a liner--not for a slot in the dam, but for the pond. The do make them in huge sizes, and a 50' square liner is about $1000. that would certainly give instant gratification and save a big ol' headache. It would also allow you to maintain both clear water and koi, which tend to stir up the mud in farm ponds like mine.
Interesting problem, I hope you keep the board posted!!