I don't really know what the fuss is about since the simplest solution is the most obvious one. Masking should be optional, it should be enabled by default and controlled by the checkbox next to the entry field.
Web forms are where the usability rubber hits the road online. When adding an item to your form you should always be of the mind set that this extra step (optional or not) will lose you conversions, but you have to have it because of X. This forces you to justify placing item X, which in this case is the unmask password option. Is having an option to unmask the password field going to gain you more conversions than not? I have no data, just anecdotes and experience, but those all tell me no.
Putting a check box next to the entry field is putting GUI decisions on your user because you can't figure it out, and it will lose you conversions.
EDIT: Re-reading this it sounds like personal attack on the OC. It's not. I'm using the universal you.
Designers have to be aware that in some browsers there'll be a checkbox next to password fields.
I'm pretty sure you can implement something like this on the web with some simple javascript, dynamically changing the input type from "text" to "password" and vice versa.
Or you can put this option in menu or status bar or whatever.
By the way, I don't understand your complaints about design and layouts. I've never had problems with designing forms. Maybe this is because I didn't try to replace native controls with some uber-fancy things? (which is a good thing)