1) Will cooperating with government make bitcoins go up in value because it may result in their adoption by the mainstream, or will it make bitcoins less valuable because it diminishes financial privacy which is a very important motivation for a lot of people.
No, it will make them go down in value. What advantage does an anonymous crypto e-currency not calculated in dollars have over a debit card for an average house wife trying to buy a shirt on Amazon.com? Absolutely none. The application is in people who are doing other things with their money. 
I would have no interest whatsoever with bitcoin if there was not this anonymity component. Without this, it is NOT better money/payment method, and HARDLY interesting.2) Assuming that companies like Mt Gox become registered MSBs, what are the prospects for outlaw exchanges and a successful black market in bitcoins where you dont have to present your papers in order to transact business?
The prospects are not good for outlaw exchanges in the USA. Look up "goldage" "arrested" "unlicensed" in google.The prospects are very good for exchangers outside the USA who do not have to put up with the US government's unstoppable idiocy.
The people who are most interested in bitcoin are people looking for anonymous payment methods (don't believe it? just look at the rise in $ value since the Silk Road news hit). If they can't get it in the US, they will take their money to exchangers who respect their wishes. If the US government wants to drive out exchangers (and they do), so be it. Foreign exchangers will benefit.