I'm sorry to say I've only read snippets of your conversation, so I've probably missed a few things. If so, I apologize.
The "blue line" was actually something GO looked at for Niagara Service. It was ruled out in favour of CN's corridor along the south lakeshore (and rightly so, given the greater population along that route).
I think the proposed elevated light rail system that Ontario wanted to "demonstrate" in Hamilton in the early 80s (at NO COST to the city; that's twice now in 40 years... do we go for three?) was a HUGE missed opportunity. It was killed by local opposition on the mountain and a lackluster political will that didn't consider the long term. Very unfortunate. It could have sowed the seed of something akin to Vancouver's current system; I have little doubt there would have been a good case to extend it across both the lower city and the upper.
Bear in mind that many of these freight lines -- some of which could very well host some kind of successful passenger service -- are tightly held by CN and CP. The ones they deem expendable have been ripped up (e.g., the CN line that's now the Escarpment Rail Trail, the CP line through the Dundas Valley that is similarly a trail). The ones they still hold dear won't be given up, even from their 'cold dead hands'
Here's a good history of rail transit in Hamilton:
https://www.raisethehammer.org/article/3747/light_rail_transit_in_hamilton:_the_story_so_far
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