Stolen Identity (Aim + other stuff)

If I walk into your house you should be able to mug me for my wallet (identity theft)?

No, but the internet is slightly different from real life events. They can be compared in some instances, but in that one, no, they aren't the same.

Identity theft is a huge thing online, and using someone elses wireless connection is asking for your shit to be messed with.

A better comparison would be you coming into my house uninvited, giving me your wallet, and then expecting me not to steal your identity.

I don't see how this works. Ok, so if I enter my credit card number online to buy things, this person can find out what it is?

Well, the site should be using SSL if they handle credit card info, but with enough computing power and free time, sure, why not? More likely, it starts with using an unsecure service like webmail. From there, they can reset your paypal password and find out your bank account number and so forth.