Funny how that turns out, eh?

I think you're getting confused. Steam (as in the stuff stored on Valve's servers and not in the client directly) does not activate your game on third part activation systems. The client part of Steam (as in the bit on your PC) runs an installation script that contacts the activation system with the required information just the same as an installation script on a retail based game. If Steam went kaputt and the need to authenticate via Steams authentication server were removed, that very same installation script would still supply the CD key to the third part activation system much in the same way that you can keep manually inserting the key for a retail run installation script (and even some of those now automatically send the key).
And if you ever need your CD key for a Steam based game, you can either use the right click context menu to view that information, get it from the text file it's stored in, or get it from your registry, or from the handy little pop-up display that shows it every time you run a game -- until you tell it not to. Or any combination of the above depending on the game in question.

Nobody expects the Fanboi Inquisition!

Not when I've got a grenade launcher and a Remington fully loaded next to my bed!

Erm yes which is the same as saying "does the installation and authentification for you" which is what I said. How does that make me confused? You're simply repeating what I said but replaced "Steam" with "Steam client" which is semantics - the Steam client gets its info from the Steam servers including your cd key.
And the inevitable question then would be: how would you activate the installation script by hand? (although I'm not even convinced this script is stored locally in the first place) I mean, the activation is originally part of the installation program which you don't have. Steam replaces part of that program but you'd still need to be able to manually activate that script. If you know of a way to do that, please tell me since it's useful to know but I kinda doubt it's as simple as you make it sound.
As long as your client will still run after Steam goes down, no problem - but registry settings and all such stuff is not going to be an easy option for most gamers regardless. It would mean that you would need to mimic whatever Steam did during "installation" of the game and that can be tricky.
Anyway, we're sidetracking. My original point was simply this: the whole situation would not that simple (as this argument has more than proven) and the Steam crusaders can't simply state that they'll "fix it" when Steam goes down since it would mean a lot of issues to solve.

It's really rather simple. So I really don't understand why you are having such a hard time understanding how Steam works.
Let me try to explain it one last time.
To install a game on Steam you:
1 - Download the game from a content server or
2 - Restore a local backup
Then, when you run the game for the first time:
1 - Steam contacts it's own authentication server to verify that you own the game
2 - The install script which is stored locally on your PC in the game's folder is then run.
3 - When the script is set to, it can automatically pass information to the third party DRM authentication server
4 - The game launches and you play the game
OR:
Steps 1 to 2 above will occur then,
3 - The game launches and displays your CD key as a pop-up message
4 - You then enter the CD key when prompted and the game contacts the third party DRM authentication server
5 - You play the game
OR:
Steps1 and 2 above will occur then,
3- The activation dialog box for the third party DRM authentication is displayed and you enter your CD key, which is displayed via a dialog box in Steam
4 - The third party DRM authentication server is contacted (via your interaction) and your game is validated
5 - You launch and play the game
In all of these circumstances it is either yourself, the game or the game's installation script that handles the activation of third party DRM, NOT the authentication servers for Steam.
Thus, if the steps above pertaining to Steam's authentication servers are removed, the steps for authentication by third party DRM systems will not alter one little bit.

Why do I get the impression you don't properly read someone's reply before writing your own :S. First you repeat everything I said, and now you give a long explanation while ignoring most of the points I made (including the one where I stated that we sidetracked far too much and that my original point still stands).
For starters I never said anywhere that the authentication servers do the things above. I simply stated that the Steam client does this automatically after you download the game so if Steam goes down, you'll need to find a manual way to do the authentication since you won't be able to reinstall/redownload it.
I asked in my previous post for info on how you'd manually install and activate a game since I'd be interested to know but you give me vague stuff like "it's in the game's folder and then you run it" ... except I just checked and there's no such thing in the game's folder. There's nothing in there that can be run except the game file itself. I looked through all Steam sub folders and the ONLY thing that is there outside of the game folder, is the NCF file which is a file index that is used to check a game's integrity and to determine whether it needs to be patched or not.
In short, where did you get the idea there was an installation script? It's the first I heard about it, that's for sure and I don't find any evidence of this in any of my game folders.
Anyway, this argument is silly - we've completely sidetracked and it's pointless anyway. Suffice to say that if Steam were to go down, it would be quite a mess.

I thought you meant the VDF files but wasn't sure since those are not scripts but merely data files. Also, they don't store your CD key - like I thought, the Steam server has your CD key - it's not saved on your local PC unless the game itself has it stored somewhere. I guess that makes sense in a security way. And you still can't run VDF file so you're back to zero - for casual gamers, this is just not going to be a solution and I think you know that.

I've not been following this debate much, but I just feel the need to point out:
Casual gamers are irrelavent. How likely is it for a casual gamer to want to go back and play a 5+ year old game (let alone a 10+)? I'll give you a hint: Most casual gamers don't even know what DOSBox is, and thought WinXP never had a bug :p

Erm except Steam sells brand new games? If they buy a game and Steam goes down a week later, you don't think they'll just go "oh well, tough titties, no more game" or do you think they'll want to get it working without Steam?

Somehow, I doubt Steam is going to go down overnight. When it does die, it will be a slow and painful death for all involved (or we'll find out that the CEO of Valve likes little boys, one or the other).
Just saying, arguing that getting something working for a casual gamer isn't really the best metric. There are some casual gamers who don't even know how to install a game from a disc...

The CD keys are stored locally when you restore from a local backup (and most likely downloaded with the game initially too). I've tested this by intentionally blocking access to the internet during installation and the CD key information is still given correctly.

Believe it or not I received a second Steam support reply two days after my reply to their solution. Referring me to the above solution.
So I'm clearing out everything in my Steam folder except Steamapps and Steam.exe. I have no clue how this will do ANYTHING at all.

Waste of time. The content you get is based on the location the key is for. If that's a regional CD key for Germany, you'll get the censored version regardless of where in the world you are. Deleting files on your PC is not going to change that.
This is why, when the Orange Box was first released, valve employees were advising people in Germany to import retail copies from the UK if they wanted uncensored versions.