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Interesting. Assume you're referring to the iPhone 4. iMovie has an option to export at three different resolutions (360p, 540p and 720p) so I guess that the iPhone just records at 720p.
 
Yea, I would like to have settings for

1) Reduced quality video recording
2) Various resolutions for camera photos

I mean my 5 year old digital camera has those options so I assume it is possible right?
 
You can do this only if you jailbreak it. I forget which file you need to edit. But it still won't give you a switch you can just flip for a different quality.
 
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