The Red Ring of Death - Cure Found!

The towel trick does work. 

What happens is that the Xbox 360 gets very warm as its in use.  Warm enough infact to cause the motherboard to slightly warp where the heatsink is mounted to the cores.  By doing the towel trick you warm the motherboard up so much that it becomes more pliable and reseats itself.  Another issue is the thermal paste used within the 360.  It doesnt seem to have the best lifetime, as it tends to seep out of the heatsink as the console is on.  Again, by warming it up so much the thermal paste becomes more pliable and tends to also reseat itself.

Is it crap that Microsoft designed a product where these issues exist?  Absolutely.  The above workaround is effective however.  

Moreover, if your not scared to take your 360 apart (for instance its out of warrenty) if you completely take off the heatsinks, put your own paste on, and then mount the heatsinks to the motherboard via screws the problem completely goes away (the heatsink is on tightly enough to keep the 360's motherboard from bending).