I wonder if this button applies to photo folders as well??
The "Set All Folders" button does change them for all folders -- photo folders included. However, after that you can change the photo folders to "Thumbnails". This is usually easier than going through all folders and changing them individually.
Now that I've mentioned that, I'm not sure Office uses the same defaults as Windows Explorer. My Office 2007 seems to keep a separate set of default folder options from Explorer. I set all my folders to default to "List", but Office (specifically Word) opens in the "Detailed" mode, which it was before I changed it for Explorer.
I believe that the best answer is simply to change it in Word (or whatever Office program you're using), and its should stay that way.