I agree with oasis on this one.
Adding passwords to user-albums would not weaken the existing auth system at all. It's just an additional, optional layer of restrictiveness. And the real power of such a setup, is that the users can set, unset, or change their album's password as they choose, without any admin intervention, and it's about as easy to do as typing in the new password.
The password setup has a specific use, and what I would call a narrow scope of "consequence". Extending the current authentication/usergroup scheme to encompass user-albums would be quite involved and tricky, as the preceding posts in this thread already evidence.
Users can't determine who is in which of the usergroups -- without adding user-createable usergroups to the mix. And observe also: a password actually functions
as a user-created usergroup. It's not quite as flexible to cover all possible desired uses and inclusion/exclusion schemes, but for ease of implementation and typical usage it's a darn good solution.

Joel