Stop trying to seek order from disorder. It may make you feel better but it's a false comfort. There was and always will be disorder.
All gains retreat. Trees don't grow to the sky. Every bull run has pullbacks in the larger trend. When the run up outpaces fundamentals (as in real estate values doubling every few years), the pullback will be more extreme. When the run up is built on massive leverage, when there's no "there" there, when the emperer's new clothes are a mass hallucination, someone is bound to see through it and expose it for what it is, and that's when the pullback becomes dangerous. My initial question remains unanswered though: Will these toxic assets remain under the rug forever, or are the financial institutions going to have to write them off at some time?
Well the concept of 'writing them off' is just one of accounting. I would submit that as long as the accounting remains fraudulent, a recovery will be impossible, as people will simply continue to have no faith and confidence. Legitimate economic growth, a legitimate economy, involves actually making things. Full employment for engineers. Engineers at the top of the food chain, not bankers and other assorted leeches.
Eventually they will be written off. You will know when that day is closing in, because a "new" dollar will be official US currency. The amount of write-off will be a much reduced percentage of on balance sheet new dollars. What is also certain is that individuals, even those burdened with debt, will not reap the same benefit of devaluation.