Yes. Your crazy.
Just kidding. But your idea really is. The weight of dirt in 3' would
snap off your picket fence posts like nothing, and your wall will end
up on top of your kids, along with a few hundred tons of dirt.
Pressure treated is okay -- it does rot eventually, and is not exactly
cheap either, but can be simple to work with. BUT, it really sounds
like you need to do some reading. Look on google -- there are plenty of
sites detailing how to build a retaining wall, including how to deal
with: water and drainage, footings, deadmen/tiebacks, setbacks,
acceptable height, frost and snow, and so on. Come back and ask again
after you have read up a bit.
(I also can't for the life of me figure out why you think you need a
picket fence in front of a wall anyway.)