if your only an 1/8" down, you need to lower it a whole lot .... just guess but it should be much closer to an inch. lolol..
you do know to leave the front plate off to watch whats going on right ?
I put this problem with a 128, don't know why it did dawn on me right off , but the needle plate hole had small piece missing at the hole, so it won't form a loop. changed that plate and it was sewing like new .