I'd throw my lot in with the "you can pick your custom title, but it's gonna be black" camp.
It might be a little odd to the newbies, but if we watch to make sure people aren't putting "Moderator" in their text, it shouldn't be too bad. Besides if a false mod (hmm, I'll stay away from that one
) thrashes a newbie, any user who sees it will PM the newbie and tell them it's not a real mod. Plus if they posted after the person and said: "Dude, (s)he's not a mod, don't listen to 'em." then the chances it would cause trauma to the newbie is next to none. This gives the non-mods a chance to police (like they do anyway with trolls) and if they PM the mods, the troll get's the left foot of fellowship.
I don't think it would cause too many problems, personally. But Ash seems to imply that this would be a lot of work, so I guess it's up to the mods ultimately to see what the trade offs are. Perhaps you should start a poll in general and see what the consinsus is?
Anyway, my $0.02.