The Mad City is part of the Dreamlands described in the Cthulhu MythosMother When is one Avatar of Nyarlathotep that just pass to be more active in the Dreamlands. Just For The Evuz, as usual, he/she/it created the Mad City and manipulates regular people to enter portals to the Dreamlands(The Doors), giving also Madness Powers to them just to make things more amusing. The Madness powers work and can manipulate reality becuase the more insane you get, the more open your mind becomes to the reality of the Mythos, until all that's left of you is a minion unable to get out the Dreamlands. Of course, you also can get out and Awake, but you can't enjoy normal life because a part of you knows the world is bigger than that. Even if you Awake you lose because you can only scape because Nyarly would get bored if he always win. About the 13th Hour, as Incarnation of the Will of the Outer Gods, he has somo limited control over the powers of Yog-Sothoth that allow him/her/it to manipulate space and time.
WMG / Don't Rest Your Head