Even though encryption takes place, people can still type in your password. Encryption only protects the password from being stolen from the database and used directly. If I were to retreive your password from the database - Let's say the password is "dog" - I'd get "e49512524f47b4138d850c9d9d85972927281da0". However, hackers only need to try to crack the sha-1 with a Rainbow Table, and it'll be hacked. Considering "dog" is only three letters, it'll take less then an hour to crack.
I cannot say why this has been implemented, but I didn't experience it. I guess it's to stimulate people to get more difficult passwords, that are harder to guess, considering about half of the MySpace passwords are a normal word of 7 letters with a 1 behind it.