I'll repeat cdnchris's point above, because it's so important to the understanding of the matter: you cannot remove grain from the picture without also removing other fine detail. Broadly speaking - and I'm sure people more knowledgable than myself can elaborate on this - the way grain is "removed" is by throwing off the focus so that grain can no longer be seen, and then artificially enhancing the resulting image so that it gives the illusion of sharpness. But the problems with this approach ought to be fairly obvious.
Of course, because the final image seems so "sharp", it's easy to think that you're seeing more detail, especially compared to an standard definition image. But you're simply not seeing the detail that you should be seeing, in addition to losing the original feel of the image.
For me, the simple answer is that the grain is the image: that's what the film image is made of, like the oils in an oil painting. If the aim of a BluRay transfer is to duplicate the filmic image as accurately as possible, that means duplicating the grain. Grain varies hugely according to the filmstock used and the conditions under which it was exposed, and that's all part of the story too.
The Blu-ray that really rammed home the virtues of extreme grain for me was the BFI's GAZWRX: The Films of Jeff Keen, which were sourced from 16mm and Super 8.
Hand on heart, the Blu-ray of Marvo Movie is a completely different experience from the YouTube version - the HD version gets you up close and personal with the very texture of the film, and you can see exactly what Keen physically did to the print.
I had a similar experience like Michael with both the Jeff Keen set and more recently the Stan Brakhage set. The Brakhage set was one I wore out when it was in standard def and I'm now starting to wear out the Blu-Ray. Seeing something as short and as beautiful as Eye Myth on Blu-Ray was an extremely different and more detailed experience. The colors, the strokes of the brush and the one image of the mysterious man in the middle of the frame looked so different than it did previously. And his films are the few where I will pause and literally go frame by frame. The digital era was made for his films!
I am a tremendous fan of film grain. The other night, I bought a half-priced copy of Everlasting Moments on Blu-Ray not because of what I heard, but solely because I wanted to watch an extremely grainy film. Watching films on Blu-Ray recently has given me a new appreciation on different film stocks that directors and cinematographers use or even the look of digital in films like Zodiac or the films of Michael Mann which are loaded with that green digital grain. It all makes such a vital difference to the film.
Also interesting to mention, but I saw Scorsese speak a few months ago at LACMA regarding film restoration and he said out of personal experience with directors, he said a lot of classic directors weren't fans of film grain, but because of the film stock the studios supplied them with, they had no choice, but that personally he's a tremendous fan of it as that's the way films originally looked like. I've always felt the same way, but the grain is always an element I've loved and it reminds you constantly that the film on your disc was once an actuall tangible format and now is encoded as digital information on a disc. I always thought that's neat.
This debate always reminds me of those ones of small record labels that transfer 78's to CD's with as little digital touching up as possible and it might alter the original sound. Taking the grain out of a film that has it changes a film completely. Take a look at the Citizen Kane laserdisc from Criterion and the flat looking Citizen Kane from Warner. Bros to get a great example of the importance of grain.
Moreover, I think a lot of people who don't understand the importance of film grain don't appreciate that if you remove the film grain you're merely replacing it with digital artifacts. The actual image of the film isn't "underneath" the film grain and you can't just remove it like dirt.
Although the recentish restoration of It's a Wonderful Life removes the grain and yet maintains sharpness (on both the dvd and on the digi 'prints'). Maybe they contrast boosted to counteract the softness which would come from grain removal? It looked really strange.
But I agree, grain is just part of the process if you shoot with certain film speeds. Removing that later is silly. Many of the best moments quality-wise on the Stagecoach BD are the grainy close ups - because they are just so detailed.