Tricky to respond without seeing how your dog is thinking, and to how he sees you and the rest of the family. At one point in the messages he sounds, maybe a bit too confident, then not aware of what's acceptable and then the rest frightened. All these require different approaches. I agree totally with everyone on the fact that the crate is NOT for punishment, but their safe haven ie place to rest, escape from kids, hoovers and strangers. When fed in there, treated in there etc, without necessarily being locked in, it can then be used in all sorts of instances where ther eare issues ie if the dogs starts biting you at some point in the car, the dog being in his homely crate would prevent this.

With terriers I would not develop the killing/ratting instainct with squeeky toys, squeeky running children etc. I would put nasty flavoured something on my hands and teach the dog to play with me with something like a long rope tuggy. I would have set quality down on the floor 20 min play times a day, teaching him when I'm happy with him and when not. During these play times smile, and if his teeth go on you, look disgruntled and immediately walk away ending the play. The idea you said about putting the dog in another room is right in principle of removeing your attention, but I would be removing myself as that is a quicker point made.

Hope I don't sound bolshy, but in close circles, I am known as the bitch :-)

Good Luck