—Illustration by John Corbitt

Warren Buffett likens the financial shock Americans have suffered to that of a heart attack victim “flat on the floor.” The problem didn’t develop overnight. It won’t be fixed quickly or without further uncertainty and pain. And it’s disproportionately affecting older Americans.

The problem started with what Buffett calls “geeks bearing formulas,” the brainy Wall Street brokers and bankers who created endless investment schemes. Add greed, hubris and the speed of instant financial transactions, and the entangled global economic machinery collapsed under its own weight. Confidence and credit vanished, and without them, the free market economy could not function.

Long gone are the It’s a Wonderful Life days when a buyer financed his home purchase with a mortgage from the neighborhood savings and loan and faithfully repaid it. Two decades ago, the S & L industry collapsed, and commercial banks began repackaging mortgages as bonds and selling them to investors. These bundles were then sliced and diced according to risk of repayment. These slices became another investment opportunity, a pattern replicated for financing mergers and acquisitions and even for anticipated highway and tunnel tolls, and created an alphabet soup of investments that involved trillions of dollars.

Who imposed any discipline on this free-for-all? Regulators have been in retreat for three decades. Banks pointed to rating agencies, which assumed the fundamentals would be checked by investment banks, which assumed global investors would do their own due diligence.

Now, several months into the effort to untangle the regulatory system, former Treasury Secretary James Baker can still say, “No one knows who owes what with which and to whom.”

Here's what we do know. The impact of the financial shock has been keenly felt by older Americans, affecting the value of their homes, retirement plans and nest eggs at the very moment when individuals have greater responsibility for managing their retirement finances but less time to recoup their losses. (One positive note: This should end the debate over privatizing Social Security.)

Employee-managed 401(k)s have replaced employer-managed defined benefit pension plans as the major provider of retirement income, but they have lost $2 trillion in the past 15 months, according to the Congressional Budget Office. For those still working, jobs are in jeopardy. For those needing short-term financing, loans are scarce. For those needing public transportation, education and health care, state and local governments are stressed by shrinking revenue and are cutting services.

“Unlike Wall Street executives, American families don’t have a golden parachute to fall back on,” said House Education and Labor Committee Chairman George Miller, D-Calif.

But irrational despair is no answer. Instead, this is a time for learning the fundamentals of sound personal finance: Don’t dip into that nest egg. Tighten your family budget. Prepare for high gas, heating and health costs.

And, above all, keep a steady hand.