The truth, as always, is somewhere between the two, but you have to admit that the prospect of a game with content limited only by its players' collective imagination is intriguing. When I ran an article on the Dalaran coins during the Wrath beta, one of the more popular suggestions in the comments was that players be allowed to write and add their own coins to the city's fountain. As proof that it was kind of the UGC problem en miniature, everyone agreed that moderating it would be an absolute nightmare.
There is one thing in WoW that I think is especially compelling as a potential source of UGC, and it's the auction house. A little more than two years ago, Basil wrote The case for open orders on the auction house, and his suggestions fascinated me. Being able to post an order on the AH and the price you're willing to pay for what you want could have an interesting, and potentially beneficial, effect on server economies. As a plus, for anyone with cash flow problems who want something less static than dailies, you could always check to see if, like the goblins, you've got what they need.
The whole idea sounded so good that I'm sure there's a down side I'm not seeing. Are there aspects of WoW that strike you as particularly conducive to user-generated content, or is it just asking for trouble?