Someone has taken this idea one step farther and started a business that uses print-on-demand technology so kids can now write and illustrate their stories and create real (i.e., not handmade-looking) books. It's called Tikatok.com, and it's pretty slick. According to the video on their site, it does require web access because the kid has to type the story directly into a special interface. Illustrations can be scanned and uploaded or mailed in by snail mail.
There's no charge for making a books, but the copies sell for $20 a pop, so that's where Tikatok makes its money. They're counting on parents wanting a copy for Grandma and Grandpa and maybe doting Aunt Sally. The interface offers story suggestions—I guess even kids can have writers block—but it doesn't look like it stifles creativity in any way, so I think this is a Good Thing.