I'm arguing that we have a moral obligation to speak up and take a stand in the face of racist statements.
A) Is there anything that's so far out of line it shouldn't be said
No. There should be nothing that is too far out of line that, as individuals, we should be prevented from saying it. There should be no law banning any free speech whether you like it or not. You do not have the right to not be offended. Should the Klan be prevented from marching? No. Should any anti-whoever or pro-whatever group be prevented from publishing or in any other way presenting their thoughts? No.
OTOH, as a 'society' we should discourage others from using certain extreme language/epithets. Which leads me to:
B) Do we have a moral obligation to stand up and disagree with something we think is wrong.
Yes, I think so. But, we have to temper that obligation to some degree. There is the right time, right place, right way to handle things like that. Obviously personal safety & job security are valid considerations, as is, unfortunately, a teacher/k-12th grade student situation among others. I think forums such as this are completely fair game. If some racist idiot wants to spout his/her BS then others who disagree have an obligation to call them on it. In public, in full light of others. Will it cause them to "take it underground"? maybe. But it also lets them & others know that their ignorance isn't going to be accepted.
Which brings up another point that was made; that being "does anyone think that by confronting the offending person that you will somehow 'change their mind'"? No, not always. Maybe never. The point of debate is not to change the position of the person you are debating but to change the minds of the spectators to the debate (which is why PM's for behavior like that is pointless). If nobody in society ever said that they thought that XX was wrong, even though up to that point XX was standard practice, nothing would ever change or evolve. Take your pick of XX being any social ills, slavery, drug abuse, alcoholism, sexism, racism, violence, religious persecution, etc. Should you be prevented by law from doing (most of) those things? No. Should society be used as an influencing factor to bring about change that's generally good for that society? sure. Social stigma is fairly effective in stopping negative behavior, more so if used in conjunction with legal prohibitions.
Hence, you have the mods here banning the N-word because they don't want to be associated, however remotely, with the idea that they condone what that word implies (even though infractions for posts taken out of context is a little draconian ). I think any reasonable person can understand the extreme, historically racial connotation of that word. Most people's reaction to the word is on a gut level instinct, which is why racists still use it; to "get a rise out of others" as was even admitted here. I'm not saying that other words aren't racist as well it's just that that particular word conjures images that reasonable people abhor. It may not be 'fair' that the word is given special status but life's not always fair (fairness should be the goal but its not always the case).
Sure being PC sucks but what is the alternative? The PC movement came about as a response to society being too crass & vulgar. However, I agree we have gone too far in that almost anything can now be considered non-PC.
I think the reason for that is that most people have their own issues that they are 'sensitive' about. (race, religion, sex, flag desecration, etc.). To them, not wanting to be offended is not 'being PC', it's just common courtesy. You can't have it both ways. We either generally agree as a society what speech is acceptable or any discussion turns into a free-for-all.