If you have this annoying bug and want to find a way how to bypass it and keep uploading/using images on your blogger posts then this is my fix. Again don't know if this works for everyone but works for me... so don't be lazy and just try it out! ;-).
1. First go to your post editor and click on the "Edit HTML" tab which should take you to the post editor in HTML (sees the below screen-shot).
|Click on the "Edit HTML" Tab ...|
2. Now click on the usual "Insert image" icon inside the "Edit HTML" window which should bring the image uploading in the "HTML version" so to speak. As a tip you can put your mouse hoover wherever you want to put the image (within the written text) or you can freely move it around once on the compose mode.
|Then click on the "Insert image" icon|
3. Now this will bring up an image uploading in a new window and from that you can choose how to use the uploading needs to be done such as via your computer or the web... and how it should be located like left, right... (which can be changed in afterward anyway).
|Make your choices and when done click on "UPLOAD IMAGES" button..|
4. After selecting your image then click "upload image" button and when it is complete then choose "done" button that come afterward.
|Finally click on the "DONE" button to let the image to embed on the post...|
5. Now click on the "Compose" tab next to the "Edit HTML" tab which should bring you back to the blogger post editor.
If everything went smoothly then you should see an image uploaded in the post. And as usual you can drag and move it around with ease to anywhere you want within the post.
So until Google fix it you can use this as a workaround for uploading images to your posts. Hope this helped.