Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

New Paradigm

What it is:

A new paradigm is a new logical framework for understanding a situation. In the financial markets, a new paradigm refers to the shift in the underlying economic rules and factors that affect the markets.

How it works (Example):

A new paradigm can apply to a shift in any framework or context:  from technology to political order to economic systems.  For example, since the mid-twentieth-century, the economic paradigm was characterized by readily accessible and affordable credit, fundamentally open markets, and the value of the US dollar as the first choice reserve currency around the world. 

Indeed, debt has proven to be an efficient method for companies and individuals to leverage and improve the value of their assets.  The strength of the US currency has dominated most debt and equity transactions. Utilizing fundamentally open market principles, the capital markets have been largely self-correcting, and, as a result, minimizing the need for restrictive regulations.  The discipline of debt and the free open markets have yielded unprecedented sustained economic gains.  From an economic perspective, most observers thought that this paradigm was good.

The possible new paradigm suggests that there is a lack of regulation, an overuse of debt, and a fall of the dollar as the dominant currency. Additionally, the precipitated economic instability, losses, and a restructuring of economic power across the globe suggest changes from the original paradigm. 

Therefore, while it is still early to identify all of the characteristics of the new economic paradigm, it is clear that it the new paradigm will involve an expanded role of new international markets as the major players in the world economy, an increased role of government in the regulation of domestic and international commerce, and a more sober use of debt and equities in financial transactions, especially involving the securities markets.

Why it Matters:

A new paradigm, brought about by a paradigm shift, changes the underlying assumptions and logic of how a system works.  In the economy, for example, the new paradigm is an attempt to explain the current economic crisis and the range of interventions that are needed to find a path towards new economic stability.

For example, the ascendency of new production and consumer markets, such as Eastern Europe and China, the increasing attractiveness of foreign-denominated securities, the increasing demands for transparency, reliance on the value of underlying assets, and the expanded role of government (financing and ownership) and regulation in the markets, are all components of the new paradigm.
While the paradigm shift may explain what happened, critics contend that the change may not offer viable solutions that will stand the tests of the market.  Time will prove whether or not the new paradigm will be correct.