Internet Slide, a Thought
Jude Wanniski
March 30, 2000


There must always be at least one reason for a sharp market selloff or a sharp market surge. The NASDAQ selloff has me thinking of a connection to April 15 and the fact that there is no withholding on capital gains. There was a selloff last year too, remember, with a bounceback after April 15 and a flat market for some months thereafter. In other words, people who took capgains before December 31 now find they owe Uncle Sam and must sell equities for that purpose. As they see the market slide, they know they better sell sooner than April 15 or wind up having to take deeper losses this year. The funds are not lost to the economy, but they might as well be, as Treasury takes the receipts from NASDAQ sales and uses them to pay down the national debt. A poor use of capital.

In the course of researching "The Way the World Works" in 1977, it dawned on me that FDR's earliest "success" as President came when he called a "bank holiday" in 1933 at the time of his inauguration. The three days the banks closed ended the panic runs and Roosevelt looked like a genius. What happened? Back in those days, March 15 was not only inauguration day. It was also the deadline for paying income tax. And in 1932, Hoover had persuaded Congress to raise taxes to balance the budget!! There was no tax withholding at the time, so households across the country that had increased tax liabilities had to draw down bank balances to send checks to Treasury in Washington. The banks became illiquid as a result and there were "runs" developing. The three-day bank closing allowed time for the reliquification of the banks.

My thought about the weakness on NASDAQ may or not be a factor. There can be other reasons, given the sensitivities of the enterprises. As I noted earlier this week, the House Democrats are backing a two-year tax moratorium on the Internet, and if that prevails, the risks of taxing of e-commerce arriving sooner -- through a tax harmonization scheme at the state level -- are increased substantially. Hmmmmm. Any other thoughts?