my ipod touch 2 somehow created its own password and I'm locked out. How do I fix this so I can use my device?
It can't create a password, someone has created it. To clear it you will need to connect to your computer and Restore it in iTunes.
Place the iOS device in Recovery Mode and then connect to your computer and restore via iTunes. The iPod will be erased.
iOS: Wrong passcode results in red disabled screen
If recovery mode does not work try DFU mode.
How to put iPod touch / iPhone into DFU mode « Karthik's scribblings
Retrieving data ...