Thursday, May 13, 2010

Art and the Dismal Science

After the financial crisis of 2008 and the deep, painful recession that followed, journalists began looking for reliable experts to explain what went wrong and what might happen in the future. Suddenly, New York University economics professor Nouriel Roubini became a star. In predicting the collapse of the housing bubble, even as the players at Lehman, Bear Sterns, and other firms dived into the mess ever more deeply, Roubini earned the nickname “Dr. Doom.” Here is a great shot of Roubini, who by the looks of things knows how to enjoy a downturn.

                                          The Law of Supply and Demand

Recently he has been making the rounds of TV shows to promote his new book, Crisis Economics: A Crash Course in the Future of Finance. In this interview, he notes that today’s near-zero interest-rate environment may lead to the next financial bubble, as “a wall of liquidity chases assets.” In other words, when companies can borrow money cheaply (think sub-prime mortgages) and take risky leverage positions, bad things can happen.

I have a different way of predicting financial bubbles: The art market. It’s not scientific, by any means, more like a hobby of mine—or just a superstitious reaction to the personal spending habits of people who can spend vast sums on art. But I believe in it, more or less. When prices of art at auction rise rapidly, I always wonder what kind of irrational exuberance is in play. And the results of the recent contemporary art auctions seem to be extraordinary.

In he very active bidding on Wednesday night at Sotheby’s in New York, only a few of the 53 pieces failed to sell, and the total sales came in at $190 million, above the estimate of $168 million. A 1986 Andy Warhol “Self-Portrait” (I love the photo below, taken by Timothy A. Clary for Agence France-Presse) sold for $32.6 million, crushing its $15 million high estimate.

                                          Andy at an angle

The seller of the piece was fashion designer/movie director Tom Ford. The buyer was unidentified.

On Tuesday night at Christie’s, the best-selling author Michael Crichton sold Jasper John’s “Flag” for $29.6 million.

                                           A salute to Wall Street bonuses

There is obviously some money around these days—let’s pray it the good, old-fashioned Wall Street bonus money and not the highly-leveraged, bought-at-zero-percent kind of money that Roubini is warning about.

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