Check out Windows Live Writer--a free download from Micro$oft. It gives you a great WYSIWYG editor for your blog even if it's hosted by Google.
Download and installation took quite a while for such a small program, but configuring it for my blog took no time at all. It even grabbed a sample post from my site to allow me see in real-time what my post will look like. I've made major updates to the templates Blogger gives you and I'm self-hosting so that's no small feat.
It also gives you drag and drop image support (see above). I'm planning to step up up posting on the myriad (yep, spell check works) of blogs I've started and abandoned, so this should keep me engaged for a while.
I totally found this on Timmy's TechToolBlog so blame him if it destroy's your system.