This illustration above shows the knee from the side. The blue bit (coloured just for contrast - it is not blue in the real person) is the capsule when the knee joint space is inflated. Note the extent of the joint space, reaching a handsbreadth above the joint and right round to the back of the knee.
At the back of the knee however - unfortunately - there is an anatomical deficiency in the capsule, and when the joint space is under pressure the synovium may herniate to form a fluid-filled Baker's Cyst.
Because the capsule is water-tight, the space within the knee joint can be inflated with fluid (eg during keyhole surgery) or may become swollen when irritated (filled with joint fluid) or after injury (filled with blood).
On its inner aspect the joint is lined with cells which secrete the lubricating joint fluid (synovial fluid). This joint lining is called the 'synovium'.