In Kingfield, a young Barney Gumble plays with a paper boat in the gutter on a rainy day. When the boat goes into the sewer, Barney tries to get it out, only to find Krusto instead. Krusto drags Barney into the sewer, killing him. Sometime after this, Homer puts up missing person posters for Barney. He then cycles away and is attacked by the local bullies; Super-Intense-Kid Chalmers, Seymour Skinner, and Dewey Largo. Homer sees Krusto in the bushes, watching the bullying. Homer calls out to the clown and escapes down the hill, with the bullies following. As they get to the river at the bottom, a group of kids come to Homer's aid and chase off the bullies, with Marge hitting Chalmers in the face with a baseball. The gang introduces themselves as the Loser gang and takes Homer to their clubhouse. Outside the clubhouse, Comic Book Guy warns Homer to stay away from Marge.

In the clubhouse, Homer tells the other kids about seeing Krusto. The gang then tells their stories of how they've also seen Krusto. They decide that they have to stop him so they go to the Kingfield Clown Archives to do research and find who the killer clown is. Whilst there, Homer writes a love poem for Marge. Marge and Homer figure out that Krusto has had several shows other many years and he wasn't funny in any of them. Eventually, Krusto started to kill children in Kingfield every 27 years. As Marge and Homer show a clip from Krusto's show The Yuk-Yuk Hour with Krusto!, Krusto emerges from the television and tries to kill Comic Book Guy. Homer stabs Krusto with some garden shears before Marge shuts the TV off, temporarily defeating Krusto. The gang then arms themselves to go to Channel 14 to defeat the killer clown. As they are doing so, Comic Book Guy finds Homer's love poem.

At Channel 14, Homer sees a box labeled "Free Candy" and opens it, revealing Krusto to be hidden inside. The Losers attack Krusto with their weapons, but they are ineffective. As Krusto starts to brag about being invincible, he slips on some marbles and goes through a lengthy slapstick comedy routine where he hurts himself repeatedly. The children all laugh at this, which surprises Krusto as it's the first time children have actually laughed at him. Krusto continues to hurt himself for laughs until Marge gives him some Li'l Stinker Cherry Bombs to eat. Krusto eats the cherry bombs and explodes, defeating him. Later, the gang makes a pact to return if Krusto shows up again. Marge then makes out with Comic Book Guy after he claimed that he had written the love poem for her.

27 years later, Jimbo, Dolph, Kearney, and Nelson find a pie shop which wasn't there earlier. The bullies are then killed by Krusto, who was using the store to attract them. When this story plays on the news, Homer realizes that Krusto has returned to Kingfield. He remembers the pact he made and calls up his former gang to come back to defeat Krusto once more. In the time that's passed,Moe went on to form Metal Moe, a rock 'n' roll ventriloquist act. Carl became an astronaut, and bailed on a flight to destroy an asteroid to see through his pact. Marge and Comic Book Guy had gotten married, with Marge owning a seltzer company. They also had two children, Bert and Lizzie. Comic Book Guy refused to go and help Homer stop Krusto, but Marge left in the night to go herself.

At D'ohs tavern, the gang reunites and tries to come up with a plan to defeat Krusto once and for all. Comic Book Guy then turns up with the kids to bring Marge home again. Marge tells the kids to wait in the car whilst she argues with Comic Book Guy. Bert and Lizzie then walk past Needful Crap Secondhand Store and get kidnapped by Krusto, which he reveals to the Loser gang on their phones. The gang then returns to Channel 14 to rescue the kids and defeat Krusto.

They tell Krusto that they have gotten over their childhood fears so he has no power over them anymore. Krusto then reveals that adults have something tastier than fears, anxieties. He also reveals that Comic Book Guy didn't write the love poem. He makes the gang see the things they are anxious about and grows more powerful from the laughter of his ghost children audience. Bert and Lizzie realize that he gets his power from the audience sign telling the kids to laugh. Homer gives Marge a rock to throw at a sign, and Marge realizes that Homer wrote the poem. Marge goes to throw the rock at the sign to destroy it, but Krusto tries to eat her before she can. Comic Book Guy jumps in the way and gets bitten badly by Krusto, as Marge manages to throw the rock and destroy the sign. The kids all go off to Heaven as Krusto loses all his power and dies. Marge looks over her dying husband and tells him that she can't forgive him for lying to her for all the years they've been together, which makes Homer happy.

On their UFO, Kang and Kodos realize that their plan has failed and look through other books to decide on what they can use next for world domination. They eventually settle on the book The Tommyknockers, not knowing what Tommyknockers even were.