If you allow the camera to store the image at enything less than its native resolution and quality you will lose some information.

If you force the camera to store at (say) 2MP, you are losing around 7MB's of image information on an 8MP camera. If you shoot at medium quality you will end up with a 7-800k image - or a 90% information loss.

If that one image turns out to be 'the image' that you realy wanted to be able to print at poster size you are not able to because you already lost 90% of the detail.

For example, this is an image that I took using my wife's point and shoot



Now with a little cropping and editing that would make a great wallpaper image ?

except

I was shooting at 1.3MP because my wife forgot to pickup the stash of cards for her camera and we only had a 16MB one so some idiot (me) reduced the quality and resolution so that we had some pics of our trip.

 

Actually if you don't have to crop, wouldn't the 1.3MP picture fit perfectly as a wallpaper on a 19" LCD which usually has 1280 x 1024 resolution?

 

No - I do not own or use a monitor of such piddling resolution !