For the record, you can have everything properly configured and still get
the "Serial Line is Looped Back" error message.  Generally I get this if
there is no connection establshed (i.e., the local modem hangs up before
connecting to the remote modem) but pppd goes ahead and tries to do its
thing.  This is more or less what you are experienceing, I think, except
your modem isn't even trying to dial anymore.

As for this "ppp magic", I would disable or ignore it until you solve the
modem problem.

JO