1) You treat your hosted weblogs much as you do your discussion forums. You set rules and guidelines for those public weblogs you host, and if the rules are violated you remove the weblog after the fact just as you'd remove a nasty discussion forum posting. You don't edit public weblogs beforehand, just as you don't screen forum postings.
2) You set yourself up to be the local version of Blogger, which is merely the provider of technology to allow folks to publish weblogs -- but does not claim any control over or responsibility for the content of any of the blogs. That'll take some fancy legal language, no doubt.
I think No. 1 is the answer. Public weblogs are really just a variation of the discussion forums that news sites have successfully run for years.
