In his exhaustive study of Hellenistic bioi, Klaus Berger has shown that ancient biography (a genre he placed the gospels within) contained a good portion of creative "fiction" (Aufsteig und Niedergang der Römischen Welt, 1984); Richard Burridge also has written at length about the cultural context and the way biographers used what would today be considered "fiction" to give true portraits of their subjects (What Are the Gospels?, 2004). The "fictional" creativity in bioi was intermediate between that of historiography and that of the encomium or novel. What set the gospels apart from other bioi however is their intensive intertextual use of literature (e.g. the OT) that was only secondarily interpreted to describe the life of the biographical subject -- in ch. 11-16 of Mark alone there are more than 57 quotations and 160 allusions to scripture. This suggests that, quite unlike standard biographies, the gospels used non-biographical sources as primary source material about their subject. The gospel writers would have certainly regarded scripture as a true witness to Jesus, perhaps even superior to human witnesses (cf. John 5:31-39, 5:45-27, 12:41, 1 John 5:9). If that is the case, I see no reason why the authors should have viewed themselves as writing "fiction" or fabricating stories if they viewed the prophetic word as a witness to Jesus' life which may be consulted alongside other sources -- whether to augment, clarify, or even correct what the human witnesses say -- and if they regarded their reading of scripture as guided by the same Holy Spirit involved in its writing. It is worth remembering that midrash itself was not construed as a fictional activity but rather as a process to discern the true meaning of scripture; haggadaic readings were thought to lie beneath the surface of the text. Since fidelity to scripture was a measure of the truth of a matter, stories that brought out the scriptural truth of Jesus would not necessarily have been dismissed like pagan fables and myths (which were rejected precisely because they were contrary to scripture) if they were upbuilding and revealed aspects of his character and teaching that were apostolic, "orthodox", or considered true.
Then there is the matter of the memory of eyewitnesses. Bauckham has convincingly illustrated the fundamental flaw of form criticism in omitting actual witnesses and presuming only anonymous tradents, but there is a big difference between (presumed) witness testimony and historical accuracy. It hardly needs to be said that memory is a reconstruction and not a record -- it tends to blur recollections, fill in gaps with pre-existing schemas and memories of other people, it is biased by social environment, and it changes over time and with retelling. Psychologists recognize that witnesses extract from their perceptions an interpretation that is meaningful to their own beliefs and needs and this transformation from raw perception to interpretation is automatic and regardless of conscious effort (so people trust their memories regardless of whether they are accurate). It has been observed from study that witness narratives transform each time they are retold, recollections of unrelated events may be conflated together, and memories commonly incorporate information learned after the event. A good article about this is "Illusions of Memory" by Elizabeth Loftus (Proceedings of the American Philosophical Society, 1998), which points particularly to group settings where people come together to share their memories about a common experience as an environment when imaginative transformations of memory unintentionally occur; Loftus points out that this should not be surprising since "perceiving a stimulus and imagining a stimulus appear to involve similar brain mechanisms. That imagination activities can alter autobiography reveals something important about the flimsy curtain that separates imagination from memory" (p. 68). In experimental studies, people were easily induced to remember events that never occurred, and false memory is a well-known phenomenon occurring in social contexts where visualization and focusing of memory are prominent (such as therapy sessions, witness interviewing, support group meetings, etc.), and especially if the memory has important social value and serves to advance a common narrative. Your mention of UFOs reminds me of the recent studies on the development of the Roswell UFO crash legend (such as B. Saler, C. A. Ziegler, and C. B. Moore's UFO Crash at Roswell: The Genesis of a Modern Myth, 1997), in which the content of witness testimony changed dramatically over the decades in response to the overarching narrative taking shape in popular culture. I can think of similar examples of witnesses to the JFK assassination or to the events of 9/11 changing their stories to better fit with certain popular narratives that arose after the event. On how false memories could historicize things that never occurred, I recommend Peter Lamont's The Rise of the Indian Rope Trick: How a Spectacular Hoax Became History (2005). One analytic study of memory along these lines is Believed-in Imaginings: The Narrative Construction of Reality (APA, 1998). I am not saying necessarily that these factors definitely played a role in the growth of oral tradition about Jesus, but I believe that there is a very strong possiblity of this -- enough of one that dismisses the idle objection that there would have had to have been a "conspiracy" if witnesses told stories that did not accurately reflect history. What we have in the gospels is the endpoint (or rather, an endpoint) of a long process of people telling and retelling their stories in group settings in a context of a highly focused agenda and evangelical purpose, where one person's memory could influence another's, where some people's memories were more authoritative and important than those of others, where memories that better supported the common theme could be valued more than others out of harmony with it, and especially where the scriptures had such an crucial role in the telling of the story of Jesus. Acts portrays Peter even before Pentacost interpreting recent events in light of the scriptures. How can you be so sure that it had no influence over the telling of stories? It is reasonable to suspect that witnesses were subject to its influence as much -- if not more -- than the influence of other witnesses. In a manner rather similar to "recovered" memories today, a witness could have had his or his memories tripped by reading a passage in the Psalms and recall, "Oh yes, I remember that now," even if that particular detail was not part of their original recollection of the event. In other words, the process of exegetical interpretation probably did not start with the gospel writers. Although they gave the exegetical traditions their final form by directly importing the language and thought from OT texts, they probably in many cases were induced to do so because their own witnesses and tradents preceded them in applying these scriptures to their own memories and traditions. Then there was the problem of witnesses who were really not witnesses at all, but who had a good story to tell. If their story supported the overall community narrative and theology about Jesus, and had didactic value that advanced the gospel, I doubt that such stories would have been necessarily flagged as suspect. Again, I do not wish to be misread as suggesting that the whole shebang necessarily was invented, as that is just as unreasonable as insisting that the gospels must be 100% accurate. I am arguing that there is plenty room for non-historical content -- especially in areas where there was little opportunity for witness testimony, where it would have been hard to identify exaggerations or false memories of witnesses if they had the "ring of truth", and where the author's creativity may have filled in gaps or harmonizing the different traditions of different witnesses. It also should not be forgotten that there was an ideological aim in the gospels to present Jesus as the singular Son of God who stands apart from other miracle workers, so writers likely had a preference for stories of a more remarkable character that emphasized this. It is also worth comparing this situation with contemporary reporting of the news of the bizarre and unusual. There is a lot that is reported in the world, especially by the credulous writers, that relate incredible miracles and wonders every bit as remarkable and wonderful as what is described in the NT. There very well may be genuine unusual, paranormal, unexplained things in the world. But very often these sensational reports are not accurate and have normal, non-paranormal explanations when the facts are closely examined. So how people interpret what they experience in the first place may differ considerably from what actually is going on.
http://www.jehovahs-witness.net/watchtower/bible/167595/1/Are-the-gospels-just-midrash