My guess is because the new blgos are being generated without the www in front, and the server is set up to redirect non-www requests back to the front page.
Because if you look close, that's what's happening.
the site is http://www.aristasia-central.com/heartbook/
new blogs are created like aristasia-central.com/heartbook/newname/
And it redirects on you. So, it's not a folder permissions issues as MU does not create new folders for the blogs (they're virtual, they only live in the database).
The easiest way to fix it to change the server to use the non-www on the main site, and edit the files on blog 1 to take out the www. (go to Site Admin -> Blogs, and Edit)