I think it'll be fine. Powermods will end up being a thing again, but that only matters long term when the users are denied the opportunity to pack up and make a new camp. It'd be interesting if some sort of system were attempted to try to counter the phenomenon, but I won't get my hopes up.

I'm sure we'll end up repeating a lot of dumb stuff that happened on reddit. Just so long as it doesn't get totally wrecked like they did, it should be okay. I don't want to see shit like shadowbanning, bots checking post history for naughty words, scripts that auto-ban users from one section because they made a post in another section, groups dedicated to harassing neighbors, etc.

And yeah, it's sad, but I know schizo posters are real. I try to talk them down occasionally but it doesn't seem to help. But letting them run their own little camp? That should be no problem. Who could they bother there, the 4 people that follow them? I'd even abide my own enemies a place to gather as long as they keep to themselves.

will report innocuous posts as "degenerate", they have very strong political views and want opposing views removed

The report screen implies that false/frivolous reports are punishable. Do you know if that is the case? The mods would probably need a record of who reported what for this to be possible. I think that sounds fine. If a mod starts using it for bias, the admins should be willing to step in.

Actually, I'd be tempted to force reports to be public. "snitches get stitches" should only become a serious issue if the group has a problem with their ruleset. Maybe only test it in one community to see how it goes.