I think there is an insidious layer to the banks buying and holding treasuries. And that is that without them, the Fed would be forced to buy treasuries directly at an even greater rate. All those assets on the TBTF books are hiding the lack of demand for even more US debt.
It is another house of cards. The FED lends the money to buy the US debt and pays a hundred plus basis points for the lipstick on the pig. If inflation really starts as Paulson argues, look for an absolute collapse in Treasuries as the banks begin to dump the shrinking assets.