The password / security discussion may be beyond me. The 2nd time I installed knoppix I choose the encryption option, which resulted in an encrypted USB drive and a required password - so I might be missing the point of this whole discussion - seems like security to me.
The encryption option of persistent memory is only useful in case of stealed computer. During use of Knoppix all is decrypted and you have no security against attacks over WAN or LAN.