Former Treasury official: 'Nuts' not to raise debt ceiling

When Lehman declared bankruptcy during the heights of the 2008 financial crisis, it marked the largest bankruptcy in US history, and it played a major role in driving down financial markets. The Dow Jones Industrial Average dropped 500 points the day the firm filed for bankruptcy -- the largest at the time since the terrorist attacks of Sept. 11, 2001.

"There are a lot of people talking about this debt ceiling of being no consequence and we can blow right by it without any consequences, and I just think it's nuts," Millstein said.

He also said a U.S. default on its debts would reach far and wide, because so many governments and institutions invest in Treasury bonds, which are widely viewed as extremely safe investments.

"It's not just the Chinese and Japanese bond holders who hold our Treasurys — it's pension funds and insurance companies and banks, money markets and mutual funds," he said.

Leadership in both parties have indicated that the $14.3 trillion debt ceiling will need to eventually be raised, but Republicans are demanding major commitments to reducing the federal deficit in exchange for their votes. The Treasury Department expects to hit the current limit by May 16 and expects it would default on its debt by July 8.