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If Republicans and President Barack Obama were to fail to reach an agreement to raise the nation's borrowing authority, that would be "pretty damn dumb," said billionaire investor Warren Buffett in a taped interview that aired on CNBC Friday.



In addition to the upcoming October or early November deadline on the debt ceiling, the prospects of a government shutdown next month also loom.

But Buffett, while critical of this type of partisan bickering, told "Squawk Box, "the market is not gonna fall apart, because [investors] expect Washington will only act irrationally for a certain length of time."

(Read more: Buffett: Stocks now 'more or less fairly priced')

Republicans are looking at the debt limit issue and the waning government funding as leverage to push deficit-reduction plans.

The GOP-controlled House is pushing through a stop-gap federal funding bill to avoid a shutdown, but it includes measures to gut the president's health-care law.

Obama has vowed to veto any such legislation.

Buffett said he sees health-care costs as a "huge problem for the country … but that's not the fault of Obamacare," because the spending trends have been in place for decades.

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"Health-care costs in this country are a tapeworm of American business," he continued. "Overall, the economy has a 17 percent-plus of GDP going to health-care costs."

Buffett was interviewed alongside Bank of America CEO Brian Moynihan before a student forum at Georgetown University in Washington, D.C., on Thursday.

On health-care costs, Moynihan said, "[Obama's] Affordable Care Act, the debate around it, has actually just focused business on how much this is really costing them."

The real economy

Buffett said that three-quarters of his businesses under the Berkshire Hathaway umbrella are doing better. "Our furniture stores are up 8 percent or 9 percent ... carpet is strong," he added. "Our railroad carried 207,000 cars last week. That's the highest of the year. Our peak was 216,000 [cars] ... before everything hit the fan" during the financial crisis.

Over at BofA, Moynihan told CNBC that American consumers are spending.

"September so far is about 5 percent to 6 percent over last year," he continued, but acknowledged, "people wish this were going faster, but it's just a lot of work to take a huge economy like ours and get it completely back to where people want it, 3 percent-plus growth."

It was just over two years ago that Buffett's Berkshire took a $5 billion stake in Bank of America.

Countrywide troubles

Moynihan also commented on lawsuits facing the financial industry, as a government lawsuit accusing BofA's Countrywide unit of fraud in the sale of billions of dollars of toxic mortgage loans to Fannie Mae and Freddie Mac is scheduled to go to trial later this month.

"To go through a trial is tremendously expensive, for both us and the other side, and typically that's what leads you to some rational conclusion," said Moynihan—adding, if that happens, it's usually at the last minute.

The alleged practices that the government is suing over happened in 2007 and 2008, before BofA bought Countrywide.

"We always make an assessment ... what's the cost to defend yourself versus the cost of a settlement, and then what are the ramifications of that settlement," Moynihan explained. "Unfortunately we've had to make it more than we'd like over the last couple years, honestly."

—By CNBC's Becky Quick and Matthew J. Belvedere.