Let me preface this with a simple comment; I am British and so obviously am an outsider looking in. The closest I got to America was having a relationship with an American girl.
Now on to my thoughts as an outsider looking in;
As keyguy says, fly the correct flag over that confederate memorial; The only crime of those dead soldiers as a group was to be on the wrong side of history, give them their (proper) flag and memorial for pities sake.
To refuse to allow parts of the south to fly a flag they feel represents them, whether they call it the Confederate flag, the battle flag of the confederacy, the Rebel flag or the lollipop rainbow flag, is tantamount to me turning to the Scottish and saying "What? You cant fly the Scottish Saltire! Don't you know its associated with the Scottish Jacobite rebels who wanted to disunite this country after the acts of union?!" It's not just silly, not just selective morality (looking in, I see parallels between the American Revolution and the attempted secession of the CSA. From what I can tell, the argument from the Union side for the war was Restoration of Order, that the CSA could not legally break away. I would like to remind people that the Thirteen colonies could not legally break away from the British Empire, but did it anyway. To argue that restoration of order means the south had no basis for secession is to argue that the US should still be British. To further contribute to this selective morality, it is my understanding that there were Union officers who owned slaves and confederate officers that were abolitionists, and that the sides chosen were chosen for reasons that went past "lolracism me want slaves" so it is unfair to brand the flag representing ALL the ideas of the CSA as racist simply because slavery happened to be legal when the CSA was formed, and happened to be legal when it was crushed underboot. The CSA didn't exactly have the chance to reform it's self in its own course of time now, did it?) but is also by its nature the suppression of freedom of speech... In spite of the US proudly trumpeting the constitution and the amendment to it garunteeing free speech. While I am no expert in US law and regardless of my personal opinion on the boundaries of free speech, such an act, by its very nature, has to be a breach of this amendment and as such would fit the criteria for that word Americans fear over almost all others "unconstitutional."
A picture is worth a thousand words is very apt here, this image will mean something different to everyone. It is unacceptable to state that your interpretation is the only acceptable one and then ban the symbol. Its like banning Hindu's from using the Swastika because "its racist" even though to Hindu's its a positive symbol. Its short sighted, ignorant and above all a suppression of the rights of the people who wish to fly it, whether you agree with them flying it or not.
What ever happened to "I do not agree with what you say, sir, but I will die for your right to say it"?