NCPA - National Center for Policy Analysis

Credit Due To Capital Markets

February 2, 2000

The role of capital markets is to channel money from those who have it to those who can employ it most efficiently. And experts say that process has improved tremendously during the past 107-months of economic expansion. In fact, the improvements have been a major factor in the boom.

  • Experts hold that the "new economy," wherein financial risk is swapped, shared and spread through many channels is more energetic and enjoys new protection against the painful attacks that periodically afflicted the old economy.
  • Traditional banking has faded in importance, economists report, while even Americans of modest means can enjoy the benefits of 401(k)s and home equity loans -- with more sophisticated players using derivatives, asset-backed securities, initial public offerings and venture capital funds.
  • The expansion of capital markets means that money is available from many different types of lenders and investors -- which lowers the odds that any one crisis will bring the economy to a screeching halt.
  • Within the new economy, venture capital funds have blossomed -- growing from a value of $5.8 billion in 1995 to $28.6 billion for the first nine months of 1999.

That development makes funds available to high-risk, high-reward start-ups -- whose founders have been the engines of the new economy.

Yet for all of their advantages, the tools of the new economy -- such as derivatives -- have injected unprecedented leverage and complexity into the system, experts point out. They warn that such elements could also transform a minor economic dip into a calamity.

Source: Jacob M. Schlesinger, "Why the Long Boom? It Owes a Big Debt to the Capital Markets," Wall Street Journal, February 1, 2000.


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