"Nation! I am enraged!" he yelled to his audience. "AIG announced this week that they are giving executives $US165 million [$240 million] in bonuses. Excuse me? That bail-out money is supposed to be used responsibly - in ways we never see, to prop up businesses we don't understand," he said.

"Well, the Government says they can't stop it, but we can, folks! Our founding fathers knew that when the rights of the people get trampled we must become a torch-and-pitchfork-wielding mob, empty of all thought.

"Let's go get AIG!" he said, brandishing his pitchfork as his audience cheered wildly.

Colbert's skit came uncomfortably close to the mark. Americans - who have spent a year watching jobs disappear by the hundreds of thousands, unemployment rise to a 25-year high of 8.1 per cent, their neighbourhoods decimated by foreclosures and their pension plans slashed by a stockmarket they barely understand - are viscerally angry.

But it is not just outrage at the sheer chutzpah of those at AIG who took bonuses after the company was given $US170 billion of taxpayer funds just to survive.

The AIG bonuses have laid bare the unbridled greed that has driven US-style capitalism in the past decade, confronting even the most staunch defenders of deregulated markets. It has exposed a lack of moral compass in the system and it has rattled Americans' faith that the best and brightest will rise to the top and be justly rewarded.

Just as disturbing for some Americans, though, are the solutions that President Barack Obama proposes: that Government should intervene more strongly, that it should spend billions of taxpayers' dollars and their children's tax dollars to rescue companies and banks, that it should spend up big on government projects to save the economy. This isn't how American capitalism works, either.

It all boiled over this week. Ordinary Americans jammed phone switches at talkback radio stations, flooded blogs and TV stations with emails and deluged their Congressional representatives as the news about AIG and bonuses to executives kept coming.

The company has been forced to enhance security at the Connecticut and London offices of its financial products division, the part of the company at the eye of the storm over bonuses. It was this group of just 350 people whose trade in risky credit default swaps - essentially insurance on the value of mortgage-backed securities - brought the venerable insurance giant undone.

The lawmakers have responded quickly and with a vehemence that is almost as unseemly as Colbert's mock call to arms. An Iowa Republican senator, Chuck Grassley, went on radio to suggest that the bonus recipients should "follow the Japanese example" and either resign or commit suicide.

Washington has staged its own version of a pillorying. The chief executive of AIG, Edward Liddy, was called before a House of Representatives committee on Wednesday, where he was lectured and harangued about the bonus payments, even though he took over in October at the request of the Government - for a $1 salary - and played no part in writing the bonus schemes. He'd looked into stopping the payments but decided he had no legal avenues.

"Malfeasance" and "a complete violation of trust in the people who invested in your company," said Representative Stephen Lynch, a Democrat from Massachusetts.

"Appalling", said Joe Baca, a Democrat from California. "We have teachers right now across the nation that are receiving pink slips, especially in the state of California. I mean, they're doing an excellent job, and yet they're not getting bonuses."

Liddy was repeatedly asked to name names, which he refused to do, saying he feared for the safety of his staff. Some, he said, had already handed back the bonuses - ostensibly part of a scheme to retain key staff - which range from $US6 million to about US$100,000. Angered at his refusal, Representative Barney Frank said he would subpoena them.

Next week it will be the turn of the Treasury Secretary, Tim Geithner, and Chairman of the Federal Reserve, Ben Bernanke, for a public flogging as congressmen seek to find someone - anyone - to blame for what the White House called "outrageous" payments.

Meanwhile, President Obama was trying to harness the public anger to drive his push for more regulation and more intervention to stabilise the financial market.

"I don't want to quell anger. I think people are right to be angry. I'm angry. What I want us to do, though, is channel our anger in a constructive way," he said.

Polls show he still has a big stock of political goodwill. Some 59 per cent of people approve of the way he is handling the economy, while 40 per cent disapprove, according to a CNN poll taken last weekend, before the AIG crisis erupted.

The same poll showed that 86 per cent of people want his policies to work, although a smaller number - 64 per cent - think they are more likely to work than fail.

But President Obama is walking a fine political tightrope.

In this volatile environment, that political capital could quickly evaporate, putting at risk not just his future ability to convince Congress to support further measures to save American banks, but also his own chances of being more than a one-term president.

In the short term, keeping the American public's trust in his ability to handle the economy is paramount.

During the election campaign he faced Republican attacks that he was a socialist or, worse, a communist. The tom-toms have begun to beat again about Obama's liberal agenda.

Last week Obama hit back, telling a small business round table he was a "strong believer in the free market".

"I believe that our role as lawmakers is not to disparage wealth but to expand its reach, not to stifle the market but to strengthen its ability to unleash the creativity and innovation that still makes this nation the envy of the world," he said.

But in trying to impose remuneration caps, he risks giving the Republicans more ammunition to attack, while at the same time raising expectations too high on Main Street that he can curb the excesses of Wall Street.

Just as outrageous as the bonuses was the culture of Wall Street, based on greed, excess risk-taking and a bubble-and-bust mentality, he said on Wednesday.

"The financial regulatory package that we're designing, as well as the economic policies that we want to put in place, are going to put an end to that culture," he said.

Obama is also grappling with another serious problem. His Treasury Secretary, Tim Geithner, who was confirmed despite overlooking $US43,000 in tax, is now a target, thanks in part to his poor performance in selling the Government's plan for dealing with toxic assets.

Geithner insists he did not know about the AIG bonuses until last Tuesday - just days before the bonuses were paid - but Liddy insists he told the Federal Reserve staff months ago and he assumed they were keeping Treasury and the White House informed.

The who-knew-what-when drama is now consuming the Washington media, even though Geithner was clearly not responsible for the bonuses and commonsense says that he might have had a few more pressing issues on his desk than $US165 million in bonus payments.

Whether it's fair or not, the newly-minted President has a serious political problem on his hands.

On Intrade, a futures contract is being offered that Geithner will not survive beyond June. On Wednesday, Connie Mack, a junior Republican in Congress, and some traders on Wall Street went so far as to call for Geithner to quit. The Republican leader of the House, Representative John Boehner, said the Treasury Secretary was "on thin ice".

President Obama, however, expressed "complete confidence" in Geithner and his economic team.

"Tim Geithner didn't draft these contracts with AIG," Mr Obama told reporters as he left for California on Wednesday.

"There has never been a secretary of the Treasury, except maybe Alexander Hamilton during the Revolutionary War, who's had to deal with the multiplicity of issues that Secretary Geithner is having to deal with - all at the same time.

"He is making all the right moves in terms of playing a bad hand," the President said.

But Obama knows that the handling of the economy is the yardstick against which he will be measured by the American people in four years, and selling that message of competence is crucial to his survival.

For the Republicans, too, the AIG bonus affair has thrown into sharp focus the party's internal conflicts.

Several Republicans gleefully reminded their Democratic colleagues this week that they did not support government bail-outs in the first place. The decision to bail out AIG was the policy misstep, not the bonuses themselves.

Others, heeding the public outrage, were more focused on how to prevent such payments in the future.

By Thursday, when a bill to tax the AIG payments at 90 per cent went to a vote, it seems that outrage and free-market capitalism had claimed roughly even numbers.

Eighty-seven Republicans, joined by six Democrats, voted against the bill. Boehner described the bill as a "sham" which would not work.

But 85 Republicans voted alongside 243 Democrats for the measure, which needed a two-thirds majority. The Senate is due to vote on a similar bill next week.

Obama's success in crafting a new, more morally-centred form of US capitalism will need the support of some of those Republicans down the track.

His huge agenda of regulating the markets more effectively will be just one plank in an agenda that is, perhaps, more weighty than any other in history.