I Think I Found Workaround For Live Writer Images
EDIT: PLEASE SEE COMMENTS.
Will, do not be sorry for the pingbacks (I've noticed you added this in the end of LiveWriter needs fixing).
I also like Live Writer very much and I also suffer bad images it renders. After reading your post I played around and it seems like if you paste the image from clipboard "as is" then it sucks but if you copy the whole paragraph from say Word doc or Html page that includes the image then it gets just fine
Here is the image directly pasted form Paint:
And here is the one I copied from Word with some text (the text I erased but the image I left):
Nicer, right?
Enjoy