Two or More Dumb Questions About the Current Economic Crisis

1. When it is announced that "the Fed" has loaned AIG $87B, where does that money come from? And as a related question, is the money being loaned by the Federal Reserve Bank, or the Federal Government (and is there any real difference)? Given that the U.S. government is in debt and is running a deficit, it's not like the money is just laying around, is it?

And yes, I know that no one cut a check, and no actual cash changed hands. It's all electronic. But still, what was that money doing last week? Was it just created (minted/printed), and if so, isn't that going to be problematic wrt inflation?

2. How can free-market, pro-deregulation Republicans (like, say, George Bush) be OK with this bailout? From my stand-point, I understand (and grudgingly agree with) the bailout, since I believe that one of the roles of government is to protect its citizens in times of crisis. But if you're a free-marketeer, aren't you supposed to just let the chips fall where they may? Some people win, some people lose; that's what happens in a free market.

And, if you believe that the government should stay out these sorts of things because the free market will sort itself out, but then the government has to step in in order to prevent the entire economy from collapsing, doesn't that sort of prove that your philosophy is flawed? After the last week, unfettered free-market capitalism has started to feel a little bit like Communism to me: interesting in theory, crappy in reality.

[UPDATE 12:20]: Slate's The Explainer answers many of the questions in #1.