nope, sorry, i think bad lieutenant is an entirely solid piece of filmmaking with tons of visual and narrative flair! i don't really understand why it should be seen as some kind of in-joke excluding the director, or alternatively as a complete send up devised by him. i mean i think grizzleb would be right to say it's pretty arch in its take on cop movies (including the original obviously) but it's got some substance and serious passages rather than being a spoof movie. it's more layered than that as you'd expect from a director like herzog.
it can be very funny ('shoot him again, his soul is still dancing' for instance) but i generally felt like i was laughing in the places i was supposed to be.
'it's all a dream' is not an interpretation i'd choose to pin onto the end of the film, i think it makes more sense to take it straight up.
strange if people think it's cage at his worst. it's the one time i've enjoyed his acting. maybe it was herzog, maybe it was the role, but for some reason he pulled it off for once.
incidentally, i assumed the studio had decreed cage would take the lead, but apparently it was herzog's idea. and cage took a 90% pay cut compared to his normal fee to work with him. make of that what you will!