The stock market crash of 1929 was the product of banks encouraging investors to borrow on credit to invest in the unregulated stock market. The other culprit was a scheme invented by rich speculators known as ‘pump and dump’. These speculators would collude through syndicates to artificially inflate the value of a given stock. Naïve retail investors would then follow suit, inflating prices even further. It was at this point that the smart money would sell off, reaping great profits, while the retail investors were left holding the empty bag.
You may be asking what ‘pump and dump’ investment schemes have to do with art, the main focus of these blog posts? The answer is simple: the wildly inflated values of paintings in today’s international art market mirror the Roaring Twenties’ ‘pump and dump’ strategy. While today’s stock market is better regulated than it was in 1929 (even factoring in the sub-prime mortgage debacle of 2008), the art market, by contrast, remains almost entirely unregulated, leaving it open to the same sort of corruption and egregious price manipulation that occurred in financial markets over one hundred years ago.
In the 21st century, syndicates buy up an artist’s works, creating a supply shortage, in order to inflate prices. Less sophisticated investors buy in, thinking they’re investing with the smart money. Once the market for that particular artist’s works becomes saturated, the syndicate dumps their paintings at auction, walking away with a tidy profit while everyone else, including the artist, loses out. Why the artist, you ask? Didn’t they benefit along the way? Initially, yes, like the Roaring Twenties’ retail investor, but after the sell-off, demand for their work plummets. Their reputations are smeared as collectors desert them. Some artists are lucky to ever recover.
Currently, there is a new twist to this century-old scam, manifested in the rise of billionaires. These plutocrats are so wealthy, they don’t need syndicates. They have the economic clout to corner the market with any particular contemporary artist’s works, on their own. However, the results are the same: paintings selling for distorted and inflated evaluations. Some of these modern-day robber barons attend auctions simply to bid up prices without actually intending to buy. They view it as a strategy to protect their investment.
This small cabal of bad actors, using tax-free money hidden in numbered accounts around the world, and employing small armies of lawyers and investment advisers to ensure their wealth is perpetually protected and churning, have turned the art market into a casino where increasingly, only the uber-rich can play. And with so much money and influence controlled by so few, most governments and banks lack the will, resource or incentive to address the situation.
As far as investing in art, its buyer beware.
