I always thought of the lights as being a kind of swamp gas, what they used to call "Will O' the Wisp", a freakish but natural phenomena.
As for the faces; as I recall, they are the faces of the slain in the War of the Last Alliance, right? When Isildur cut the ring from Sauron's hand? All in all, one of the saddest, creepiest descriptions in the book.
I like to think that the faces are just illusion, and that the spirits of Elves and Men are not trapped forever in the Dead Marshes.
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