There are a lot more stimuli for the psychotic to be influenced by when they are not in a mental institution. The daily regimen of meals, groups, and drugs--these do little to stimulate the mind. To most who have experienced institutionalization, it is almost as if there is some widespread conspiracy to make the patient die of boredom.
Constrast this with being forced to live on a cold, winter street in a bad neighborhood--there is simply much more to be psychotic about. Potential dangers include threats around every corner: the police, gangs, other homeless people, or regular people who feel like being cruel. There's the weather, which in many areas of the country can get quite cold. There's disease, animals, lack of shelter. It's a whole lot of stuff to be afraid of, and a lot of it is very real.
Adding on top of this ideas of some overarching conspiracy targeted at the homeless psychotic, and there is not only the real to fret about, but the seemingly unreal as well. When one is psychotic, it's nigh impossible to use cold, hard logic to get an idea out of one's head. The conspiracy against oneself simply won't budge its way out of one's consciousness. It's not fun, I would imagine, to be on the street trying to survive with this situation at hand.
In the 1980s, many people found themselves on the streets at a time that cocaine was making its way through various levels of society. Gangsters at all levels of success competed, from large traffickers that shipped tons of cocaine, to middle-men, to your friendly neighborhood crack dealer. It would be the last whom many homeless would have more contact with, and the homeless would struggle to juggle their needs, delusions, fears, and desire to avoid danger.
The lack of funding caused by a cancellation by Reagan of a law signed by President Jimmy Carter avoided a rehaul of the mental health systems in the USA. Homelessness is like having to live exposed to the forces of nature in a place that people flock to to avoid them: a city. So, in the 80's, with the delusions caused by cocaine and Republicanism hanging in the air, being a homeless psychotic must have been like some kind of insane surrealism that attacked the psychotic from all directions.
Cocaine certainly didn't help this situation--it brought violence and race-based fear to the streets. It surely depended upon one's flavor of paranoia, but cocaine certainly magnified one's demons, made them larger than life, even as they had no life of their own. Not all or probably even most homeless smoked crack, but for those who did--it probably didn't help.
I have heard it said that when you are paranoid and you do cocaine, you think everyone is out to get you. The police, the FBI, the CIA, the NSA, the mafia, your parents, the Neighborhood Watch, various gangs, drug smugglers, the Catholic Church, the Freemasons, Nazis, the Illuminati, Jews, Satanists, Islamic extremists, and your cousin's pet dog all have it out for you and this horrible, terrible, illegal thing you have done called cocaine, and you better be ready to fight or fly.
Spread among the underground of broke people were various superstitions, various subcultures that drained a person of their money, and there were people who liked to do various types of drugs--they were all accounted for on the streets, just like they were accounted for in society at large. But can you imagine being psychotic and having to deal with all of the things that threatened you, real and unreal, on a daily basis? It must have been positively mind-boggling.
Republican cuts to social spending surely did not do much good for the psychotic on the streets, nor did the sigils they imagined meaning into that adorned the graffiti of the time. It was a time of great peril for the poor, who saw progressive legislation cut under the Reagan administration, and did not, in fact, find that wealth "trickled down" to them. It's enough to deal with whatever apparitions one sees without having to worry about what one is going to eat. Therefore, the streets were labyrinths filled with beasts both human and imaginary--surely such a situation couldn't have been deliberately engineered by cynical wealthy people?
The enemy that one imagines morphs into the enemy that one encounters for real, and with time being broken in the mind it is impossible to even get a grasp on what one thought a minute ago. Can this be the reality we desire for other people, those less fortunate for us? Does the real-life horror of psychosis fill us with a sense of beauty? It is only for the heart to decide for itself whether it is stabbed, feels compassion, or nothing at all.