Jakob Nielsen:

Most websites (and many other applications) mask passwords as users type them, and thereby theoretically prevent miscreants from looking over users' shoulders. Of course, a truly skilled criminal can simply look at the keyboard and note which keys are being pressed. So, password masking doesn’t even protect fully against snoopers.

More importantly, there’s usually nobody looking over your shoulder when you log in to a website. It’s just you, sitting all alone in your office, suffering reduced usability to protect against a non-issue.

I love how he calls it a “non-issue” … he’s absolutely right. (Via John Gruber.)