With banks in trouble and the stock market on a roller coaster ride, does a $12 million stuffed shark still look like a deal? On the eve of the Frieze Art Fair and London’s contemporary sales, we asked economist Don Thompson, author of the new book The $12 Million Stuffed Shark: The Curious Economics of Contemporary Art and Auction Houses, to weigh in.

What does the current global economic crisis mean for the art market?

That’s the number one question, isn’t it? The best guess is that the top of the market will hold up, because there are about a hundred museums that are actively purchasing art — think of the four in the United Arab Emirates, plus Qatar, and you’re already looking at the purchase of between a hundred and two hundred high-end works a year. Abu Dhabi in particular has put an enormous amount of money into art. So the best assumption is that museum-quality works will hold up, and the middle market will flatten or probably decline a bit.

The middle market is a major concern at the moment, don’t you think?

There’s a whole lot less money and a whole lot more uncertainty out there. The wild card is, how many people in the financial sector are dumping art? The auction houses will be very careful to control what comes to market in the November and December auctions; I suspect most of those consignments are already set. They will be accepting things for May and June. The lesson we learned in 1990, when Japanese banks started dumping, was that the first person got away with it, but the third took a bath. Nobody wants to be third.

That said, some people will want to sell. If you are told by Sotheby’s and Christie’s that they won’t handle your work until May or June, or until a year from now, the next thing you do is contact your three favorite dealers and try to have them sell it. That’s how the word will get out that there’s a lot of art on the market. If that happens, all bets are off.

A week ago Bloomberg ran an article saying that Sotheby’s Hirst sale was the top of the U.K. market. Do you agree?

Absolutely. That was astonishing. I was swapping ideas with four dealers and an auction house specialist before the sale, and our consensus was that half would go unsold and the rest would sell at the low estimates. Shows you how smart we are: In fact, the results were phenomenal. The average price at Sotheby’s was twice the average selling price for Hirst in the previous year. Two thirds of the work in the sale could have been purchased within ten kilometers of Sotheby’s for half the price. It’s mind-boggling. Apparently somewhere between half and two thirds of the pieces were purchased by individuals who had never bought a major work from a dealer. The role of branding is phenomenal.

Let’s talk about the new buyers in the art market. One of Gagosian’s directors recently told a reporter that the dealer is doing over 50 percent of his sales to collectors from Russia and other former Soviet republics.

For the past three years we’ve seen a higher percentage of art going to non-U.S., non–Western European buyers. But Russia is a derivative market. They buy Warhol because Warhol is bought in the West. They buy Hirst because Hirst is bought in the West. If these artists stop being purchased in the West, will the rest of the world move on to something else? I don’t know the answer to that.

But what was your thought when you heard that auctioneer Phillips de Pury & Co. had been bought by a Russian luxury goods concern?

Russian money has been looking for Western trophy companies. The question may be why didn’t they go after a majority share in Sotheby’s, which I think could be assembled for the right amount of money. Sotheby’s share price has dropped. I think someone could make an offer.

What are your one-year, five-year, and ten-year projections for the contemporary art market?

I think the uncertainty and excessive selling is going to keep the market down in the next year. We may be back to some even keel in a year’s time, but it would take a braver person than me to predict that. Nobody is predicting more than a year out.

How would things look after a correction in the art market?

It’s hard to say. People who don’t have to sell will hold their works off the market. People who do have to sell will sell. I don’t know how that balances out.

But surely some people would lose out more than others in a downturn. Who is most affected? What about artists? When Saatchi dumped his Sandro Chias, he famously put a major damper on the painter’s career. Who would be the winners and losers if our current bubble bursts?

Selling art is all right if people understand why you’re doing it. Anybody who is selling in the next two months will not be seen as dumping a particular artist — unless you dump a lot of work by the same artist. There are people who have large inventories of Hirst and large inventories of Warhol — well into the hundreds. If those were dumped on the market at the same time, it would have a real impact on that particular artist’s market. That’s just supply and demand. But neither Sotheby’s nor Christie’s will take, with the exception of Warhol, more than a couple works by a given artist for a given auction. The only way to dump a lot quickly is to give them to either Sotheby’s or Christie’s private dealing, or to give them to a dealer. Or to try to sell them offshore, quietly. I don’t have a sense that some artists will suffer more than others.

What about Frieze, and fairs in general? The mood for the past few years at fairs has been very social, very exuberant. Can we expect that to continue in this climate? Or will it become more sober?

We’ll have to see what happens at Frieze, though no one will have any incentive to tell the truth. Buyers won’t. Dealers won’t. So what kind of information you can get, I don’t know. I spoke at the Toronto International Art Fair last weekend. Most works there were priced from $5,000 to $50,000, and it was dead. Dealers told me that there’s so much insecurity and so much apprehension, no one is buying. And the problems haven’t even hit Canada very much.

There are all these theories about what would happen to the art market during a wider economic downturn. Do people buy art because they want to invest in something tangible? Is art a safer investment these days than securities or real estate?

The best of the best, the masterpieces, will always do well. But this is probably not the best time to invest in a portfolio of mid-market art. Remember that for all the talk of investment, you have to make 15 to 20 percent per year on it to cover the cost of capital and storage and insurance. What work today would you say would appreciate 20 percent a year for five years? If you want to buy a masterpiece as a store of value, that’s fine, but if you think of it as a high-yielding investment, that’s wishful thinking.

Sarah Douglas is Staff Writer at Art+Auction. She blogs at "The Appraisal."