Windows 7 is displaying that ----
Windows 7 is unable to create folder "new folder" the system can not find the file specified
while it is creating new folder in other locations. the right click menu contains new folder option .
The User profile you are logging into is probably corrupt, Make a new use account, then log out of your old one and then into your new one, can you make a folder on the new desktop?
If you can, migrate your old user profile over to your new one, scroll down to "Copying your user Profile in this link
Use the new user account for a few weeks, once you are satisfied with the new account, you can delete the old user account if you wish.
Your user profile might be corrupt, try to create a new account and then login to new one. If that work well backup all your files and move to new profile account.