You know you're in a new era when Microsoft is the humble good guy doing the noble thing, and Google is the arrogant foe of justice.
Google's hacked-together Blogger-Picasa pseudo-integration breaks when image-containing posts authored using Windows Live Writer are migrated to a personalized domain or to an ftp site.
The honorable WLW team has put together a partial solution, but really this is Google's bug.
I'm a longtime user of both Blogger and Picasa. Google is not wasting any of their billions on funding those products. I'd guess it's some manifestation of old-style revenue-funding business discipline. Personally, I'd prefer Google sell both properties to someone who's willing to fund them. I'm more than willing to pay for value delivered; Google's low-cost B-team funding approach is really annoying.