Why is it so difficult to track & recover stolen Bitcoins? I have to admit I don't fully understand the Bitcoin protocol. But from what I do understand, transactions are traceable -- it is the main reason decentralization works: the world can watch and confirm that a transaction is legit.

Why then can't we observe when a thief tries to cash out or otherwise exchange a Bitcoin that we know to have been stolen?

As Robert Wagner writes:


  1 out of every 14 Bitcoins is now stolen property, and there are
  plenty of laws governing stolen property.


What am I missing here? With so many Bitcoins identified as "stolen," why can't they be traced, recovered and returned to their rightful owner?
Transactions can occur very quickly and the stolen coins can exchange hands, split up and be mixed with other coins multiple times before the theft is discovered. Many innocent parties (whether it is merchants, exchanges or other individuals) could be affected. Who is going to be holding the bag?