My Bella used to get hives alot when she was a puppy. We now avoid fabric softeners on her blankets and mine, and avoid using Lysol because we started to notice a connection with when I cleaned the house and her episodes. We haven't had a problem since. Of course, it could be one or two of many things for your baby... I just thought I might throw a few suggestions at you.
It does sound like this person's dog is actually eating the bedding, towels, etc. because he/she is worried about the dog getting a blockage. Something that is safe to eat would be better than paper, I think, but I've given Paco Busy Bones and Kongs with treats inside, just to find when I get home that he's totally ignored them. I'll get home, open the crate, and he'll pick up the Bone or Kong and start working on it outside of the crate. I think it's his protest to being left home alone and not getting to come along more than a protest to the crate, as he never minds going in there.
To the OP, I wouldn't worry too much about your dog not having bedding - Paco shoves his bedding to one side of the crate and sleeps on the plastic bottom all the time. I don't think they mind too much, as long as they're not in there for long. Have you tried video-ing your dog after you leave, or sneaking back to the house and spying on him? I video'd Paco once and found that he pawed at the corners and sides of the crate for six minutes, then curled up and slept until I came home 4 hours later.
