That's how this feature is a good thing.

It's also a BAD thing in its own way though:

1. It caused me a "WHAT?!?! Is Moodle served as XML by default?!?!?!" panic moment.

For people who haven't read such discussions, the one-sentence summary is:
We will never be able to serve Moodle as an XML content-type, because the page could contain validation errors caused from user content (or from aggregated content) and the side effect (ugly error message, total shutdown) is unacceptable to the end user.

Sometimes you need to serve as XML (e.g. to use MathML), in which case you have to put up with this. But it's not doable in the general case. Please research the subject if you feel that I have not convinced you on the extent of the problem.

2. It forced me to find out why XML was being served and fix it on the spot, when I 'd much rather be doing what I originally set out to do.

So, considering that there are other good ways (FF's Web Dev Toolbar) to always catch validation errors, it might be a good idea to have a way to turn this feature off while keeping debugging on and still using FF.

Just my 2 cents.

There should be some sort of warning in the admin page text for "xmlstrictheaders" setting that says "You WILL break your site!!"

It is very easy to completely disable a site by turning xmlstrictheaders on!

Also, it seems like that setting will apply only to debug mode, but, in fact, it stays on even when debug and debugdisplay are both 0.

This is as of Moodle 1.9.4+

Thanks!