The mist surrounding the boat smells of sadness and gloom, and Rashid demands that whoever is making the stink admit to it. Haroun explains that it's the Mist of Misery, and Mr. Buttoo cries out that Haroun is too much like the citizens of the valley and "foolish for make-believe." He tells Rashid that Rashid may only tell happy and praising stories. With that, a hot wind blows across the lake. Haroun realizes, and says out loud, that they must be in the Moody Land. The Moody Land is one of Rashid's stories, where the weather changes constantly depending on the moods of its inhabitants. Haroun asks Rashid if he's right, and Rashid replies that it was only a story. Haroun understands that Rashid must be very depressed to say such a thing.
Haroun's realization about his father's depression indicates how important stories are in the Khalifa household. Admitting that the stories are just stories, and have no meaning or basis in the real world, is a very serious rejection of what readers can assume Rashid has been telling Haroun his entire life (that stories are important, have a place and a purpose, etc.). The realization that the Moody Land exists in Alfibay itself also brings more explicit fantasy into the story.
Meanwhile, Rashid and Mr. Buttoo are arguing. Rashid insists that people can love sad stories as long as they're beautiful. Mr. Buttoo angrily commands Rashid to tell happy stories only, and their argument brings back both the stinky mist and the hot wind. As the boat begins to rock, fear rises and the rocking gets worse. Haroun, taking matters into his own hands, commands everyone to stop talking, and at the authority in his voice, everyone on the boat obeys. The wind dies down, leaving only the stinky mist, and Haroun asks his father to think of happy times. Moments later, the mist parts. Haroun happily tells Rashid that the Moody Land wasn't just a story, and Rashid laughs. As Mr. Buttoo insists it was only inclement weather, Haroun knows that since the real world is evidently filled with magic, magical worlds must also be real.
Haroun is beginning to open up to the fantastical things that are happening to him, and this opening creates in him a sense of confidence that enables him to exert control over individuals as well as the Lake. Further, Mr. Buttoo's insistence that Rashid tell only happy stories gives readers their first taste of the idea of censorship. Mr. Buttoo fears that sad stories aren't going to help him win the election, hence his demand that they not be told. This gets at the fact that censorship rules stem from a fear of losing control over whatever one is trying to control, which will become important later in the novel.
The houseboat they’re on is called “Arabian Nights Plus One,” and each window is cut in the shape of a fabulous animal. All the furnishings are amazingly intricate, and Mr. Buttoo points out a collection of books called “The Ocean of the Streams of Story.” The boatmen show Rashid and Haroun to their rooms. The bed in Rashid's room is in the shape of a peacock, while Haroun's is a turtle. Haroun says it's very pleasant, which angers Mr. Buttoo (he was expecting more praise), but Rashid silences him and says it's time for bed. Mr. Buttoo huffs off the boat, insulting Rashid as he goes.
The story of 1001 Arabian Nights is a recurring motif throughout the text. Haroun's inability to concentrate for more than 11 minutes is also a nod to the Arabian Nights. The constant reminder that Haroun's story is rooted in other stories serves to assert that stories are living, breathing, and grow through and out of each other. It situates Haroun's story in the world, rather than insisting that it exists alone.
Haroun finds it hard to sleep, and finally gets out of bed when he hears Rashid lamenting his fate in the next room. When Haroun enters the peacock room, he and Rashid decide to switch beds because both find their assigned bed animals too weird.
Rashid has hit the proverbial rock bottom here. He feels his fate is decided, and it's not a pretty one. This provides a jumping-off point both for Haroun to take action and Rashid to begin to improve.
Haroun has just dozed off when he wakes to a noise coming from the bathroom. The light is on, and Haroun sees an astonishing figure with a monkey wrench, grumbling about his workload and the difficulty he's having finding the “Story Tap.” Haroun watches, noticing the tiny man's clothes—a purple turban and silk pajamas—and his impressive blue beard. As Haroun leans further around the door, a board creaks. The man in the bathroom disappears, the wrench falls to the ground, and Haroun grabs it.
Like the discovery that the Moody Land is real, fantastical things are continuing to happen in Alfibay. Haroun, however, will struggle to piece together how the magic fits into his “real,” supposedly non-magical land throughout the rest of the novel. Coming to terms with the magic will also lead Haroun to better understand the power of stories. (At the same time, this moment of dozing off and then waking up to start his adventure also means the beginning of Haroun’s dream sequence, when things abruptly get very fantastical.)
Slowly, the little man reappears in the bathroom and snaps at Haroun to return the Disconnector. Haroun refuses, and looking at the tool, notices that the tool is very beautiful and looks like it's made of a series of colored watery veins. He demands that the man tell Haroun why he's here. When the man refuses, Haroun threatens to wake Rashid, and the little man finally introduces himself as Iff the Water Genie, from the Ocean of the Streams of Story. Haroun is shocked that Rashid's story is evidently true, and Iff says that Rashid has canceled his connection to the story waters and Iff is here to disconnect the tap. Haroun is aghast, and Iff explains that Rashid canceled his subscription via a Process Too Complicated To Explain, or a P2C2E. Iff instructs Haroun to take the issue up with the Grand Comptroller via letter.
In these moments where the fantastical, previously believed-to-be-fictional things are coming true, Mr. Sengupta's original question (what's the use of stories that aren't even true?) requires further consideration, as now the stories obviously are true (we might remember Rashid’s seemingly joking aside that he gets his story ideas from a tap installed by a Water Genie, and his reference to “Iffs and Butts”). Even more important than that is that the very real possibility exists now for these things to stop being true for Rashid if his connection to the (seemingly literal) Story Water is disconnected.
Iff continues that the scheme is perfect, as letters never arrive to the Grand Comptroller, also known as the Walrus, in Gup City on the moon Kahani. Haroun retorts that Rashid will still be able to tell stories, but Iff insists that the Story Waters provide that Extra Ingredient. Haroun, still perplexed, asks where the water comes from, and Iff instructs him to tap the Disconnecting Tool at a place on the wall between the taps. When Haroun does, the tool strikes something very solid, albeit invisible. Haroun begins asking questions again about how it all works, but then answers his own question with: “A Process Too Complicated To Explain.”
The fact that letters never arrive to the Walrus (whose name is a reference to the Beatles song “I Am The Walrus”) is its own form of censorship, as nobody is ever able to truly voice concerns or issues to the authorities. This absolves the Walrus of many responsibilities he'd otherwise have, as well as gives him an immense degree of power. We see that Haroun is still struggling to wrap his very rational thought processes around these P2C2Es, despite his experiences on the Dull Lake earlier in the day.
Haroun asks Iff to take him to Gup City to see the Walrus so he can fix the mistake about Rashid's water supply. When Iff refuses, Haroun says that Iff will have to go back without his Disconnecting Tool. Iff finally agrees to take Haroun, and insists on leaving that instant.
This decision indicates, most importantly, that Haroun believes in the power and importance of stories, if only to his father. He believes in them enough to take this major risk to save them and Rashid.