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Opinion: Consequences of default would last generations

Jim Millstein, chairman of Millstein & Co.
House Speaker John Boehner
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With the government shutdown in its second week and the federal government only two weeks away from hitting its self-imposed debt ceiling, the House Republicans have decided to raise the stakes.

What started as a gambit to derail Obamacare by refusing to pass a budget that would fund it (and has now led to the shutdown of most federal government operations) is about to morph into a refusal to increase the debt ceiling unless the House Republican's budgetary priorities are met.

This isn't partisan gamesmanship as usual. The threat to default on the government's debt is something that we all have a stake in—a really big stake. If the government were to default, a disaster will unfold that will affect every household in America, perhaps permanently. So this time really is different.

Let me explain.

The debt securities that the federal government issues to raise money to fund its budget deficits (so-called Treasurys) are the foundation of our banking and monetary systems. Someone's debt (in this case, the federal government's) is someone else's asset (in this case, our banks, our money market funds, and each of us individually, through the private pension systems in which we may participate and through our rights to Social Security).

That is, the largest owners of Treasurys are the Social Security trust fund, our private pension plans, our banks and the money market funds. So their ability to give us our deposited money back or to pay our pensions on time depends on the government's ability and willingness to pay interest and principal on the Treasurys that banks, money market funds, private pension plans and Social Security hold.

(Read more: Boehner: No 'lines in the sand' on debt limit)

Boehner: President putting country on 'dangerous path'

If the government can't make such payments (because there is no congressional budget in place authorizing such payments), then those entities will be in a big pinch. And when big financial institutions feel a pinch, the rest of us get squeezed, just like we did in 2008. Lending will come to a halt, spending will freeze up, businesses will stop hiring.

Before Speaker John Boehner can hold a news conference to try to blame the White House for the House's failure to increase the debt ceiling, the economy will be thrown right back into recession, and the banking system will once again be on the verge of collapse.

We all have a deep interest in ensuring that the federal government pays—now and over the long term—the debts it incurs to fund the budget. And there is no question that, with projected federal deficits stretching out as far as the Congressional Budget Office's eyes can see, the government's long-term finances need repair.

Whether it's the sort of "grand bargain" the speaker and President Barack Obama have flirted with or a long-term consolidation plan such as the one former Republican Sen. Alan Simpson and Democrat Erskine Bowles have proposed, a bipartisan effort involving a Republican give on tax revenues and a Democratic give on entitlement spending must be implemented to preserve the government's ability to service its debt over the longer term.

But there is no question that the government has the ability to pay its debts today. Only the self-imposed debt ceiling is in the way.

(Read more: Ex JPM exec Staley: don't worry about 'calamitous' default)

If our representatives in Congress are prepared to put default on the table now, they are declaring war on you and your job, your pension and your savings.

They may say they are trying only to shrink deficits or stop out-of-control spending. But if they fail to raise the debt ceiling and deprive the government of the ability to pay its bills as they come due, they will put the fragile economic recovery in jeopardy and the banking system at serious risk of collapse—a collapse that would be devastating to Americans, rich and poor alike, for generations.

Jim Millstein, the chairman of Millstein & Co., is the former chief restructuring officer at the Treasury Department.