It might be worthwhile to consider it this way: a person who thought horrible things about themselves-- things which were not real-- were lying to themselves about their self worth. They lied enough that they eventually started to believe those negative messages.

The correction, the new messages that they do have worth and can be confident, often feel like lies in the beginning, hence "fake it til you make it". But that's just reality, and it's a correction of the original falsehood.

Your vehement insistence that these people are "liars" makes it sound like some asshole used that phrase in a situation where it perhaps was harmful. That has way less to do with the method, and way more to do with whatever asshole that was.

There's an extremely effective therapy that's basically that method: cognitive behavioral therapy. I don't think you'll find a high correlation between successful cognitive behavior therapy and insanity.