See if you follow my thought process here:

Sesame Street teaches us that in New York there is an ethnic enclave of puppets, similar to Little Italy or China Town.

History teaches us that ethnic enclaves such as this are usually the result of a large influx of immigrants from the same place, in a relatively short period of time.

History also teaches us that when this happens the new immigrant is frequently marginalized by society at large. Which can result in the first several generations getting heavily represented in crime and vice.

All of this means at some point in New York’s past, puppets controlled the drug and prostitution rings. Gangs of tiny fuzzy miscreants meted out violent street justice to their enemies, and did battle in the dim alleys.

Corroborating evidence: Gordon, from Sesame Street, was once a pimp. Which would explain how he has been able to spend all of his time hanging out in a cul-de-sac for the past forty-two years without any visible means on employment.