Bad argument #1: Masking doesn't help since someone can just watch the keyboard or use some extremely complicated and expensive analysis to determine what you are typing.
Response: This is like saying locking your door doesn't help because someone can just get a bulldozer and push it in. Sure, it's true, but you aren't locking your door to make your home impenetratable. You're locking your door to prevent casual unauthorized entry. You don't want someone to just wander in while you're away and take things without having to do any work at all. And you don't want someone to just barge in without knocking (well you might, but it's a case for locking your door). Similarly, you aren't masking passwords to make it impossible for anyone to ever know your password. You're masking passwords so you can log in to your email in front of your friends without them getting tempted to use the information they gleaned.
Also, I can type faster than most people are probably able to read a keyboard (and my passwords are not words which makes them even harder to figure out), but there is likely no one on earth who can type faster than people can read.
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Bad argument #2: It's ok to unmask some passwords because the information isn't critical.
Response: Take the example of looking at pictures of your cat. Where are these pictures? Let's suppose they're on Flickr. Actually, it doesn't matter much. Now, does Flickr (or this other website) just allow you to view pictures? No, it also allows you to post pictures (I wouldn't want someone posting their porn pics under my account), chat with friends (DEFINITELY don't want to be impersonated there), and even CHANGE YOUR PASSWORD thereby stealing your account. If you're just talking about password protecting a directory on your computer with cat pictures, sure show the password... but anything this trivial wouldn't be password protected anyway. Simply put, if it's important enough to have a password, it's important enough to have that password masked. Otherwise, why have it at all?
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Excellent point: Since users DO use the same password for multiple things, you don't even know or control what credentials you are giving away. You may very well give away someone's bank PIN.