Ok, so I've been playing around with various stuff, and this is my conclusion:
First activate hardware decoding in Flash. To do so, put this in /etc/adobe/mms.cfg
This gets rid of the blue people, but still leaves the leaking overlay. Also, Flash tends to crash a lot. Not at youtube, but with other video players. So now I did this in the script that launches Firefox
And voila, no crashes. No leaking overlay either. The biggest plus: No need to hack the libvdpau library, which is especially nice for those who aren't used to compiling things (you really should learn though, it's a very useful skill to have).
Now a question for the Nvidia devs: What method is used for display now that I've disabled the overlay? Also, does this have a performance penalty, and if yes how big of a penalty?