HDTVs were coming out and people were buying them, consoles or not. It obviously made sense to support them (as in inputs and such), but to mandate that games support 720p as a minimum probably wasn't such a hot idea. Yes, Halo 3 made me think of this. Note the funny that MS said 720p minimum but their flagship game doesn't even do that. Pretty telling.
I don't suggest that everyone go the Wii route (minimal graphics upgrade/controller innovation), but there is a middle ground no one covers: powerful graphical hardware outputting to SD resolutions (640x480), and then upscale the image to HDTVs.
The problem is this generation had to make two jumps for graphics. Not only are the expected to look much better than last gen, they also have to render it at ~4 times the resolution while still keeping a playable framerate. Thats quite a jump. What if you had 360 hardware having to only spit out SD resolution? They could pile on so many more effects, AA, AF, motion blur, HDR...whatever they wanted. Image quality would improve, you could throw even more polys around. It would look awesome even if it wasn't "HD".
Obviously devs are coping with the situation, and some amazing looking HD games have come out (Gears of War). Its just an inevitable growing pains, and a chicken/egg situation. Gamers want more detail, and you had to support the new HDTVs. What do you do? If you do SD resolutions your competition uses it against you since they do HD. If you go HD and your competiton creates better looking games in SD then you're also kinda stuck. Its like lose-lose, where doing both simultaniously was the only option.
Remember when Nintendo said they were avoiding the graphics debate? Well...this is exactly the problem they were facing with graphics.
I'm just a little sad there was no middle console, the powerful one that allowed games to pour on effects at a lower resolution. Anti-aliasing should be standard and just a given in any and all games. Things like that can do more for image quality than zomg HD!
I'm rambling...ignore this.