Windows Media 9 (VC-1) for encoding HD recorded shows. MPEG 4 Part 10/AVC/H.264/whateveryouwanttocallit always turns out over-blocky for me also at a size premium compared to Windows Media. I haven't "perfected my process" for that codec. Also there is no free and easy tools for encoding H.264 yet as far as I know. XviD is always a variant of MPEG-4 like Windows Media, and it also has near unbeatable quality/byte. For me, nothing beats sticking my CATV/ATSC recordings in to Windows Media encoder, and a couple hours later I have a nice compact 300 MB file. Feed it uncompressed video if possible, or very high quality compressed video. My original recordings are about 9 gigs per hour, then I delete them after I record them. Works like a charm. For decoders, I use just about what rbV5 uses. I favored the quality of the NV MPEG-2 processor compared to Moonlight/Elecard decoders. They also have a nice property page for theater presets and Dolby sound processing that sounds awesome.
What I can say is that Microsoft makes the best front-end for their codecs. Encoding H.264 with command line interface/virtualdub, or MainConcept's buggy progress bar interface, is such a thorn in the ass, especially doing the high quality multipass encodings. If someone can suggest me a good free interface for x264 or other open-source H.264 codecs, I'd recommend that to you.
As for the merits, I wouldn't bother. Just uninstall the other codecs you may have like Moonlight, and NVIDIA's MPEG-2 decoder will automatically be selected the next time anyway. The extra codecs are just clogging up your system. Either that or disable the MPEG-2 codec in ffdshow, and you won't have a problem.
P.S. My "HD" recordings aren't really high-def once they've been fed through my S-Video input device (for recording), so yeah...but I'm fine with quality even after it's been fed through Windows Media Encoder. If I fed WME real HD I'm sure the quality would be even better and less smudgy. Garbage in garbage out...