I have an honest question that I ask whenever these "graphics matter" threads come up.
Do you honestly feel that the PS2 era actually saw a better group of games than, say, the SNES era? The NES era? The N64/PS1 era? Do you really feel you were actually having more fun last generation than you were, say, 10 years ago? 15? For my own sake, my answer is: absolutely not. In fact, if anything, I might say the opposite.
Unless you can honestly answer: "Yes, I think last generation's games were superlatively more fun than all the generations that came before it," this should answer the question -- no, better graphics don't make games more fun.
Or, you can take a different approach to the topic. If you look at "Top 100 Video Games ever made" lists, (or top 10, or what have you) the bests games are generally spread out fairly evenly amongst the generations: there are often about as many NES games as there are Genesis/SNES games as there PS1/N64 games as there PS2/GC/Xbox games. It's obviously never going to be divided perfectly, but you'll find a healthy showing from all the generations. This is powerful evidence that graphics don't matter much, if at all.
Another simple, easy question: if games haven't gotten much more fun -- again, if they have at all -- but graphics are now hundreds of times more complex than they were 20 years ago, does that suggest graphics play an important role in the fun factor?