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moneybox: Commentary about business and finance.

Going, Going, Not GoneWhy does the press seem to be rooting for an art-auction crash?

By Marion Maneker
Posted Monday, April 28, 2008, at 12:28 PM ET

Fernand Léger's Étude Pour la Femme en Bleu at Sotheby's

How can you tell that it's nearly auction season in the art market? When the press begins predicting an imminent crash. Right on schedule, the Wall Street Journal ran theirs three weeks before the marquee May sales in New York City. Robert Frank, one of the Journal's best writers, quickly went from dollars and cents to scene-setting. "As a new wave of wealthy collectors poured into the market to fill their mansion walls," Frank wrote, "auctions have become competitions of conspicuous consumption, filled with celebrities, hedge-fund managers and mystery billionaire bidders from Russia and China."

It's a great image: the last days of Rome with greedy developers spending our mortgage dollars on frivolous Jeff Koons sculptures, decadent hedgies spending hot money on cool Rothkos and de Koonings, and shady former-Communist billionaires trying to buy respectability with Renoirs. But conspicuous consumption is hardly news in the art market.

Just before the last round of auctions held in New York in November, Carol Vogel summed up the mood in the New York Times: "Beneath all the bling—the glossy catalogs brimming with lavish illustrations, the extravagant parties to lure rich collectors, the impressive exhibitions of the art and the optimistically high estimates—lurks an ominous question. After three years of speculation about a bust, will this be the moment when the art market finally crumbles?"

But it hasn't yet. And that has left some on the art beat looking for other ways to scold buyers. Bloomberg's Linda Sandler recently pointed to the decorum of selling pricey art while the economy tanks. "The same day that former Federal Reserve Chairman Alan Greenspan said the U.S. economy is on the verge of its first recession in six years," she reported the evening of the Red charity auction of contemporary art, organized by Bono and Damien Hirst, "the seven pieces Hirst gave to the charity brought in about $19 million."

You don't usually see writers who cover, say, the price of wheat rooting for its decline. Are these writers trying to will the art market into failure? Probably not: They're more concerned with competitive pressures. Everyone wants to be the first to identify the next crash. The art world is haunted by the asset-mauling price swoon of 1990, a double-whammy delayed reaction to the 1987 stock market crash and the 1990 recession. According to the MeiMoses index of art prices, the art market didn't reach parity against its 1989 highs until 2003. That's a bear market lesson that no one should forget, and with the market well into the 10^th year of expansion, it's not unreasonable to expect a crash.

Unfortunately, having a foregone conclusion that there will be a crash leaves you seeing signs of it everywhere. Frank built his Journal story around the idea that the credit crunch had caused art buyers to fall behind on their auction bills. He noticed in Sotheby's annual report that accounts receivable had doubled at the auction house in 2007, totaling $835 million. Not a bad tell.

But because Frank was looking for cracks, he discounted the most obvious—and more pedestrian—explanation for the rise: Clients owed Sotheby's more because they had bought more. Sales had shot up 44 percent in 2007. Maybe not enough to explain the $835 million figure, but, still, no smoking gun.