Light yourself on fire? Pursue a series of quests designed to turn you into Madness incarnate, with all the power of Madness flowing through you and in command of the Realm of Madness? Do battle with yourself? Pursue a library that turned out to be a man? I could go on.
Mehrunes has a point. Afterall, after it's all over, you can understand the gibberish-man, change the weather to anything random, freeze time in one area while everything else keeps moving, summon a random dancer to just dance, do anything and not get in trouble for it, and very few people seem to care.
Not to mention that through the process you've also killed a king and queen for being in love with eachother, eaten Feldew to get more Feldew, to get the cure for Feldew, killed a conspirator against a Queen who later gets killed by you, killed the baby of a sad Necromancer who can bring people fully back to life, helped two different races fight, and run around like a mad-man when Sheogorath could have just teleported you everywhere.
I'd say the character pretty-much went insane, or at least did insane things. I don't know about the whole "making it up" thing, because my black finery looks pretty real, and I sold it too.
Not to mention that there's always Order in Craziness, and Always Craziness in Order. There's a reason why Jyggalag didn't just change his realm back through magic, or why Sheogorath devised a plan, not to mention he has Haskill, who is the most Orderly person I know.
There's a reason Craziness and Order were put together and not Craziness and Death.