I read this story some time ago, right after I read The Repairer of Reputations, but then I didn’t see as much of the denseness of the story as I did after listening to the podcast. I wonder how Chambers wrote this story, being so complex and yet so lightly written? Did he first devised the whole thing or did he rewrote it again and again?
When in the episode the neoclassical nature of the Fates was mentioned, I thought about the tales of the Metamorphoses, especially the myth of Pygmalion and Galatea, in which Pygmalion wishes his ivory statue of a woman into flesh with a kiss, by help of Aphrodite. (Interestingly, the Greek version of the Fates (Moirai) are thought to be an old version of Aphrodite.) I think Chambers pointed (also) to that story deliberately.
The best part of the episode for me were the thoughts on the significance of the King in Yellow in this story. I think your interpretation is very plausible: the tale being a distorted fantasy by a madman and Jack seeing or suspecting the cruel truth. I never looked at it that way. It really made my day and the tale still better!