The standoff between President Barack Obama and Republicans leaders is different from the 2008 financial crisis because this crisis is "self-inflicted," former Treasury Secretary Hank Paulson told CNBC on Thursday.
"The most basic function of Congress is to pass a budget," Paulson said in a "Squawk Box" interview, exactly five years since his former boss—then-President George W. Bush—signed the Troubled Asset Relief Program financial bailout program into law.
Republicans leaders and the president not only need to come together to fund the government and end the shutdown, but they must reach agreement to increase the debt ceiling before the mid-October deadline, Paulson said. He added that it often takes a crisis like the government shutdown to get something difficult and unpopular done.
As a Republican, he admitted that he's taking a lot of grief over the linkage of the budget issues to delaying Obamacare. "There is one element that does not reflect the views of the Republican party. They have hijacked the debate," he said.
Obama sought to raise the stakes in a CNBC interview on Wednesday—saying that Wall Street needs to be genuinely worried about what is going on in Washington.
(Read more: Obama: 'I am exasperated' over gridlock)
Paulson said he hopes it doesn't take another financial crisis to solve these budget problems—a solution that should include an overhaul of the tax code and entitlement reform.
He said he hates the whole concept of the debit limit—calling it a "flaw" in the system. "Congress has already approved the spending. And then say 'you have to then come back and agree to allow us to meet our obligations,' that's ridiculous."
Also appearing on the show Thursday, Warren Buffett said history will judge the TARP bailout more favorably than it appears now.
"If people think the banking system is unsound, it is unsound, because no bank can pay out all of its liabilities at the same time," the chairman and CEO of Berkshire Hathaway said.
(Read more: Buffett on unpopular-TARP; 'extreme idiocy' in DC)
—By CNBC's Matthew J. Belvedere. Follow him on Twitter @Matt_SquawkCNBC.