At a meeting of the G-20 over the weekend, British Prime Minister Gordon Brown turned some heads by suggesting that the cost of any future bank failures be funded by assessing a financial transactions tax (FTT) on all trades (assuming that other nations agree to implement such a tax).

While the idea that taxpayers shouldn’t have to foot the bill when a bank fails was widely agreed upon, the FTT proposal ran into a wave of opposition, including from U.S. Treasury Secretary Tim Geithner:

U.S. Treasury Secretary Timothy Geithner on Saturday firmly opposed a proposal by UK Prime Minister Gordon Brown for a global tax on financial transactions. “That’s not something we’re prepared to support,” Geithner said, speaking after meetings of Group of 20 finance ministers and central bank governors in Scotland Saturday. He added that it is an idea that has been around a long time and has received mixed results.

While I don’t think that revenue from an FTT should contribute to the bank failure fund — because that would cause all traders, instead of just systemically-risky banks, to foot the bill — Geithner should be open to looking at an FTT as a general revenue raiser, particularly as Wall Street rebounds to record profits while Main Street stays in the doldrums.

The FTT, in theory, would be a fee of a fraction of a percent imposed on all trades. Regular investors likely wouldn’t notice it at all, but it could raise significant revenue from firms like Goldman Sachs, who are consistently churning paper back and forth.

Consider that, before the economic crash, financial service companies accounted for 41 percent of all domestic corporate profits. And just more than one year after Wall Street’s collapse, they’re back to making 31.5 percent. As Felix Salmon wrote, “financial services companies are meant to be intermediaries, middlemen.” But instead, they’re netting a huge chunk of domestic profit all for themselves, casting serious doubt on whether their activities are actually providing any social benefit.

As Dean Baker, the most outspoken advocate of the FTT, wrote, “if a financial transactions tax reduces the volume of trading, and therefore the resources used by [the financial] sector, without harming the sector’s ability to allocate capital, then it will be making the sector more efficient and freeing up resources for more productive uses”:

This could potentially be a very large benefit from an FTT. If it reduced trading volume by 25 percent (the middle scenario in Pollin et al.), leading to a corresponding reduction in resource use, it would free up more than $60 billion a year in labor and capital for productive uses.

So the tax could raise some deficit-reducing revenue, while giving us a more efficient financial system. That’s something that Geithner should be willing to spend a few moments contemplating.

In a piece published yesterday, London’s Sunday Times provides an inside look at Goldman Sachs, the Wall Street behemoth that has not only survived the economic crisis, but is now thriving, with many of its chief competitors either out of business or swallowed by other firms. Goldman made a $3.19 billion profit last quarter, and the firm will likely set aside $21.9 billion for compensation this year.

Goldman’s CEO, Lloyd Blankfein, told the Times that the firm serves an important social purpose by helping companies grow. He also poo-pooed the idea that Goldman is only able to make such bumper profits thanks to government support:

Blankfein dismisses any suggestion that Goldman needed to be bailed out, and, by extension, rejects any notion that the firm is now profiting from public support. Sure, he took $10 billion from Washington’s Troubled Asset Relief Program (Tarp). But the bank has since repaid the cash, with healthy interest — 23%. Goldman also benefited from the federal bail-out of the huge US insurance firm AIG. Goldman had bought $20 billion worth of insurance from AIG and received billions of dollars — perhaps as much as $13 billion — when Washington pumped $90 billion into the stricken giant. But Blankfein insists Goldman was “hedged” against any AIG losses, in the best possible way — with cash.

Blankfein told the Times that he is just a banker “doing God’s work.”

Whoever’s work he is doing, Blankfein’s assertions that Goldman isn’t benefiting from government support seems to be at odds with history. After all, at the height of the crisis, Goldman was allowed to convert into a bank holding company — and access cheap money from the Federal Reserve — a status which it still holds, despite engaging in no lending activity at all. As Alan Schram, the Managing Partner of the Los Angeles based investment firm Wellcap Partners, wrote, “now that they are a regular commercial bank they actually trade more, which makes sense: if the US Treasury covered my losses, I would also be happy to take major risks.”

Plus, as Daniel Harrison pointed out at bNet, Goldman’s implicit guarantee as a “too big to fail” firm was likely the only thing that enabled it to raise capital last year:

At the time of the collapse of Lehman Brothers, Goldman was forced to raise $10 billion of fresh capital by selling a 15 percent stake in itself to Warren Buffett and other investors…Just days before the share sales — which directly allowed Goldman to stay afloat — the firm received around $12 billion in government aid…Presumably, if Goldman Sachs had been able to privately raise the initial $12 billion provided to it by the U.S. government, it would have done so. What seems much more likely is that the investors — including Buffett — who later agreed to commit an additional $10 billion only did so on the basis that the firm was reasonably supported by government aid.

Blankfein hasn’t hit all sour notes recently. He has been the foremost advocate on Wall Street for restructuring pay packages and he is also supportive of a resolution authority to unwind failing firms. But by living in this fantasy world in which Goldman’s success is due solely to its financial prowess, Blankfein is endorsing Goldman’s rocket-ride back to billion dollar profits on the backs of taxpayers.