It's easier to just collect every packet that passes through your antenna and batch-process it later than to sanitize it in real-time - there's handy off-the-shelf software to do the former.
Because they were in a pretty bad position once they found out what was happening? I can see an "Oh sh-, we broke the law" moment happening at the highest levels of the organization.
At least one person at Google thought it could be potentially useful:
> The report, quoting the engineer’s original proposal, gives a somewhat different impression. The data, the engineer wrote, would “be analyzed offline for use in other initiatives.” Google says this was never done.
I think Google is guilty of arrogance wrt privacy, rather than a fiendish plan to spy on people.