Capital Markets - Essay Example

Based on the significance of capital markets in the national economy of any country, this study seeks to discuss the view that capital markets created the conditions that led to the “new economy” bubble and the banking crisis. This study will support this view because of the simple fact that it has already been established that the capital markets play a key role in the national economy and, therefore, it is equally able to create conditions that lead to bubbles and bursts within the economy.

            To validate this view, the essay will first discuss the concept of the ‘new economy’ bubble and banking crisis and their correlation with the capital markets. The second part of the study will provide case examples, which will act as evidence to the fact that the capital markets created the conditions that lead to the new economy bubble and the banking crisis. The third part of the study will discuss the implications that globalization has on the capital markets.

The ‘new economy’ bubble

            According to the writings by Kelly (1998), he referred to the term ‘new economy’ is the result of a shift that occurs when the economy moves from being based on the manufacturing sector to being based on the service sector. Alcaly (2003) noted in her research studies that this particular term was coined during the dot com bubble that occurred during the late 1990s and even the early part of the 2000s. During this period, Alcaly (2003) argued that there were high levels of growth, which meant that there was an increase in the employment opportunities, and the inflation rate even declined, which resulted in optimistic predictions that were a bit exaggerated and based on irrational thinking. This is because the new economy era proved to have many opportunities and a vibrant economic condition assured investor of success on any business venture they undertook and hence, why it is was referred to as the ‘bubble’. Worse was the fact that investors did not focus on the long-term or future conditions that could result from this burst and hence, many investors made irrational investment decisions that led to flawed business ventures after the bubble ended.

            In the studies conducted by Lofgren and Willim (2006), they stated that the new economy era was characterized by high growth industries that largely relied on the use of high-end technology, and these industries went on to become the economic drivers. Moreover, this era also marked the beginning of intensive use of the internet and even the use of powerful computers in the production process and for general business purposes. This is to say that the tech bubble that was witnessed in the late part of the 20th century and the early part of the new millennium contributed to the emergence of the new economy.