Doesn't the truth lie in the middle?
From what is said, the real problem is on the phones and small handheld devices where typing is not very easy.
Why then remove the blanking out from the computers?
And for the devices where it's a problem, it means the keyboard is very small; this usually means the screen is also very small, and that in turn means noone can look over your shoulder unless they're so close to you you can't help notice they're watching.
As a consequence, it is probably indeed useless to blank out the passwords on hand-held devices.
Conclusion should be clear: the blanking out should be browser-based and not site-based. The site should just indicate with a tag that this or that field is meant to receive sensitive information, and it is not the site's problem what YOU want to do it with.
Then, everyone could choose his own settings as they see fit: the dumbasses who can't type a password would un-blank it, and the security paranoids would blank it.
Of course, since most people wouldn't even understand what it's all about, a sensible default would be provided: on PC browsers, default would be to blank the sensitive info out, and on handheld devices' browsers, the default would be to display.
and that way, there's no need for a debate on whether one or the other is good: what's good is what people want, specifically adpated to each person and each usage.