There really are multiple ways the hierarchy could work.  If we could agree on one I'd even file a ticket on it.  Since my mind hasn't moved from this idea yet, here are a couple more thoughts...

I notice in my Windows folder hierarchy that I can collapse at any level, but I can't make things stay collapsed.  If I open "programs" then collapse "desktop", programs will still be expanded when desktop is re-expanded.  I'd think clicking desktop would only show items directly under it, while clicking the global expand might better open every folder all of the way down.  What's there now just seems time consuming.  Open a folder, you have to close it.  I think if I click the folder above the one I'm in, the folders within it should collapse. 

The idea of it opening to a certain depth didn't seem too important yesterday.  But then I slept on it and remembered that many times when having multiple characters interacting I group them to a plane.  I can see some people wanting the hierarchy to show one, two or even three levels.

The most important change would simply be to give it a memory.  Even if no other behaviour were changed that would save us a lot of clicks.