Confusion with Reading Settings

I seem to get the template hierarchy in WordPress. How ever I am trying to figure out what the Settings -> Reading have to do with this. Especially the Post Page drop-down. Is it OK to leave this blank? I have set up a site (still in just testing mode) to display the *.php files that will have and I am using a custom template for a video page. I want my posts to be the videos. When I leave Post Page set to nothing every thing works as expected but when I set it to use the video page for posts it keep reverting to home.php. Is there something I am forgetting? Thanks

http://pctechtv.com/show/wpreading.png