The Arabic word hawala translates to payment or debt transfer and is the name of an informal money transfer system, traditionally used in the Muslim world, that is both criticized vehemently and relied heavily upon. It has been used to fund terror but remains an essential part of the economies of numerous developing countries.

Existing in various forms and to various degrees throughout the world, informal funds transfer (IFT) systems are used to transfer money both domestically and internationally between two parties. Hawala refers to the financial payment system that is used primarily in the Middle East, North Africa and the Indian subcontinent to transfer funds between two locations via a network of money brokers called “hawaladars.”

The hawala money transfer system predates modern banking. In fact, its origins can be traced back as far as the early Middle Ages during which time Middle Eastern merchants operated in territory that was characterized by the complete absence of formal legal systems of order. This made complex business dealings unpredictable and expensive. Additionally, the contemporary Middle and Near East were composed of an amalgamation of small tribal regions that were only loosely associated by their adherence to Islam, making it hard to complete business transactions over distances. The hawala system arose to facilitate long-distance transactions and provide stability and consistency to the economic system of the ancient Middle East. The original hawala system operated as follows:

Person A approaches hawaladar A and gives him money to send to person B. Hawaladar A knows that his associate, hawaladar B, lives near person B so he sends a bill of receipt, rather than a large quantity of cash, to hawaladar B, who proceeds to contact and give the requisite amount of money to person B. Hawaldars A and B can balance their accounts by making a similar, reverse transaction with different clients, or hawaladar A can send the money on foot, but protected, to hawaladar B. The hawaladars make a profit by charging a small fee.

In this way, businesses were able to execute monetary transactions over large distances without, in many cases, physically moving money from one place to another. In the modern era, the hawala system is primarily used by foreign workers to send remittances home to their families, and requires the two parties exchanging money to also exchange a “remittance code,” over phone or email, in place of a bill of receipt. Thus, large quantities of money can be transferred in periods of less than 24 hours. The speed of money transfer, along with the informal, hassle-free, and non-bureaucratic nature of hawala (customers usually do not require an account or identification) makes it an attractive option to foreign workers looking to send money home. The hawala system can also be a much less costly option than modern banking due to hawaladars’ low overhead costs. This continues to allow their fees to be very competitive. In addition, because hawaladars only periodically balance their accounts, there is no physical movement of cash and no official foreign exchange transactions take place, allowing hawala operators to often provide better exchange rates than banks.

In developing countries such as Somalia, years of violence and economic upheaval have resulted in the lack of a formal banking infrastructure and a dependence upon the hawala system. Roughly 80 percent of the Somali population receives approximately $1.2 billion annually in remittances from the country’s diaspora. The money is largely used by the families of expatriate workers to cover basic needs and living expenses and vastly exceeds international aid flows in the region. Another developing country which has historically depended upon the hawala system is Afghanistan. A 2003 World Bank report on hawala in Afghanistan cited that the majority of the nation’s international aid institutions and NGOs use the hawala system to transfer money into and around the country to fund humanitarian efforts. Edwina Thompson, in her 2005 book studying the Afghan drug industry, estimated that up to $1.5 billion in remittances flowed into Afghanistan through hawala networks, highlighting their dependence on the system.

Unfortunately, just as relief money flows through Afghanistan’s hawala networks, so to does $1.7 billion in revenue from the country’s Opium trade according to Thompson. Throughout the rest of the Middle East, the system has been linked with similar black market activities such as the funding of terror and money laundering. Isolated from modern banking institutions, the Islamic State of Iraq and the Levant (ISIL) has relied heavily on the hawala system to move money domestically and abroad. Hawaladars are willing to facilitate these money transfers for a fee of 10 percent, twice the amount charged before ISIL’s rise. Thus, millions of dollars move in and out of the Islamic State every day, significantly undermining the efforts of the international community to isolate the group from its finances and disrupt its economy. ISIL uses the hawala system to import and pay for food for its subjects and supplies for its fighters. The group also collects revenue via a 10 percent religious tax (known as “zakat”) levied on funds moving out of the territory. The hawala system has also been linked to the funding of other terrorist organizations throughout the Middle East and North Africa such as Al-Qaeda and its affiliate Al-Shabaab.

In the aftermath of the terrorist attacks of September 11, 2001, the hawala system has been the subject of intense criticism and scrutiny from international lawmakers and financial regulators because of its potential use in the financing of terrorism. Being an informal, trust based money transfer system, hawala is very hard to track and regulate. Most hawaladars do not question who money is going to or what it is for, they merely move it. Thus, there is not much accountability on the part of service providers, and there is almost zero accountability for clients. These links have led to a crackdown on hawala organizations across Europe and the United States. More stringent regulations requiring hawaladars to keep records of transfers and the identities of clients as well as penalties upon banks associated with suspect hawaladars have been imposed. This causes problems as the hawala system remains very hard to track and rather than risk the consequences of being associated with the funding of terrorism, some western banks isolate themselves entirely from the hawala system. Consequently, it has become hard for legitimate hawaladars to operate efficiently as their access to bank accounts has been reduced and their bureaucratic costs have risen to meet regulations.

The pivotal role that the hawala system plays in the economies of many developing nations means that any attempts to regulate it could end in economic disaster. Despite their necessity, remittances to Somalia have been impeded by suspicion of the hawala system. Periodic shutdowns of hawala organizations, such as that implemented by Kenya in early 2015, run the risk of spurring economic and humanitarian crisis. In the wake of a terrorist attack on the country’s Garissa University College in April of 2015, the Kenyan government shut down 13 hawala firms through which most remittance money going from Europe and the US to Somalia was transferred. This shutdown lasted until June 2015 and cut off, for that period of time, the millions of dollars in daily inflows to the Somali region that remittances provided, causing the Somali currency to lose 25 percent of its value and increasing the quantity of black market transactions in the country.

The juxtaposition between necessity and exploitation is a central issue in the hawala system as it currently exists throughout the Middle East. The system simultaneously assists in the development of third world countries and is used to fund black market activities that keep such nations in a perpetually “developmental” state. The hawala system’s fluid, personal nature is such that too much regulation renders it obsolete, while too little removes any form of accountability. The next step in solving the problem of hawala seems to be the development and, more importantly, the ubiquitous imposition of effective regulations on the system. Once this step has been taken, a fundamental obstruction to economic growth in countries such as Somalia and Afghanistan will have been removed.

On Thursday October 17, just hours before the government’s borrowing authority was set to expire, President Obama signed a bill to reopen the federal government. The debt limit was lifted and the government gleefully returned to its spending spree as government debt topped $17 trillion for the first time in history. The American people heaved a collective sigh of relief that our government was no longer in “shutdown.” However, we shouldn’t feel relieved because the real crisis is unresolved: the ticking time bomb of out-of-control government debt.

College students of today, my generation, and our younger siblings are certain to suffer harm from our nation’s addiction to debt unless something is done soon.

Thomas Friedman, New York Times editorial writer, says of our generation: “Whether they realize it or not, they’re the ones who will really get hit by all the cans we’re kicking down the road. After we baby boomers get done retiring- at a rate of 7,000 to 11,000 a day- with current taxes and entitlements promises, the cupboard will be largely bare for today’s Facebook generation” (New York Times). Self-made billionaire Stan Druckenmiller is touring colleges trying to impress upon students the true amplitude of the problem of the rising costs of Social Security and Medicare, which he claims is the biggest generational theft in history. “I’m not against seniors” he likes to remind people, “In fact I am going to be one in a couple of years. What I am against is present seniors stealing from future seniors.”

Druckenmiller made his fortune running a successful hedge fund, and he asserts that the current deficit problem is one that is in many ways analogous to mistakes he has seen people make in investing. People are looking at the present and not the future, he explains, “When you analyze the debt at present it looks fixable. However, this is because the expectations of government don’t factor in demographics.” For the next twenty years, we are going to have 11,000 seniors retiring each day and the proportion of seniors relative to working population is going to explode. Instead of having five workers supporting each senior we will have two. ”If you actually took what we promised to seniors and future taxes and present value both of them, that number is 200 Trillion dollars. That is the problem when you take debt of future payment to seniors and put it on the balance sheet.”

While entitlement spending on senior citizens accounted for about 30% of the government budget in 1970 it has now reached a staggering 67% of government outlays, leaving less and less for any other type of discretionary spending. While many seniors believe that they are simply drawing out the savings they were forced to deposit into Social Security and Medicare, they are actually drawing out much more, especially relative to later generations. In fact, while today’s 65 year olds will on average draw $327,400 more than they put in in net lifetime benefits, children born now will suffer net lifetime losses of $420,600 as they struggle to pay the bills of aging Americans (Wall Street Journal). To Stanley Druckenmiller, this is an affront to the basic principle of equity, “How in the world does anyone in Washington think that a current senior should get $700,000 more net, than a future senior? You are taking out $350,000 more than you put in and leaving $400,000 in debt to your unborn grandchild” (Bowdoin Daily Sun).

Although the details of the federal budget are complicated, the big picture is very simple. Debt means that we spend money now that we have to pay back later. Common sense tells us that taking on debt to invest in something productive can be a good idea if the investment allows us to increase our income enough to comfortably pay off the debt we have incurred. But this is not what the government is doing. The United States is borrowing money to pay for consumption. The government is in effect writing checks to senior citizens to pay for retirement and expensive medical care. My generation will have to pay back the money that is currently being spent on today’s overindulged seniors. When we reach retirement age, there is no way that we will have benefits at the same level they do. Furthermore, the period of deleveraging will be a drag on tomorrow’s economy.

Politicians have systematically ignored the true drivers of the budget deficit, Social Security and Medicare. Instead, budget reforms have focused more on tampering with crucial investments in education and other discretionary spending, efforts that fall vastly short of the measures required to significantly reduce the federal debt. College students, who tend to vote for Democrats, are often against spending cuts that reduce aid to the poor, research , education and environmental regulation. The reality is that even if all of these programs were eliminated, the deficit would hardly budge. Meanwhile, as debt ceilings keep getting lifted and true spending reforms that would hit entitlements keep getting postponed. The problem just gets compounded and the ultimate cost keeps getting higher.

Our generation doesn’t seem to realize that we will ultimately bear the cost of the government’s current fiscal irresponsibility. Both cuts in entitlements and spending as well as rises in taxes, or at least eliminating loopholes, will be necessary. The debt has reached a level where even with robust economic growth, we can’t grow our way out of this mess. It’s time that politicians start taking necessary actions. As articulated by an activist youth group, The Can Kicks Back, “Our country needs a grand generational bargain.” This is not a partisan issue. The current path of the United States government spending is simply unsustainable and it is today’s younger generation that will be left struggling to pay off the debt of an America that spent beyond its means.




By definition, fear and  greed mark periods of irrationality. These evil twins of speculation signal a move away from investment and into a world in which rumors, gossip, and irrational behavior rule the landscape. In the current market, a whisper of a potentially undesirable German Parliament vote could send markets down 3%.

History and psychology indicate that this is simply a bear market strung along by fear, an irrational decline that, although troublesome, will eventually return to “normal” levels. But even though the current stretch of fear is prolonged, intense, and volatile, the sobering backdrop of global financial crises and an extended recession continue to loom over the market.

Then perhaps the fear isn’t fear at all, but a justified symptom of a changing financial system.

Domestic macroeconomic issues include lagging unemployment numbers, slow GDP growth and a tremendous decrease in investment. On top of that, the housing market has begun to decline once again, corporate profits have taken another beating, and banks again are rumored to be undercapitalized. “There are issues about the weakness of banks and uncertainty about how the government will respond to another banking crisis,” says Professor Zitzewitz, an economics professor at Dartmouth College.

Even bigger issues lie overseas – the prolonged Greek debt crisis, and concerns over the solvency of Italy, Spain, and Portugal, threaten to send the Eurozone into a financial crisis of epic proportions.

With all of these potentially disastrous domestic and international issues, Thomas Flexner, Global Head of Real Estate at Citibank, believes that the market is behaving somewhat rationally. “This is reasonable fear based on the uncertainty of the markets,” he says. “Irrational implies that the fear is misplaced or unfounded.”

If, indeed, the fear is rational, then the consequences are severe. It suggests that the incredible world economic growth over the past several decades has been inflated.

“In the past twenty years, global markets were magnified by credit creation – easy central bank policies and easy leveraging created credit that turned into purchasing power, propelling global GDP,” says Flexner.

The debt owed to the creditors has to be paid back, slowly and painfully. This paying down of debt could drastically limit the advance of the global economy for many years. If our fears come true, then we could be entering a new economic reality of shrinking credit and a diminished financial  system.

At the same time, some investors continue to make big bets on our financial system, confident that the American economy can come out of the recession unscathed and unchanged. Some might argue that the bear market has been exaggerated, that although some of the concerns are real, the sharp decline in the equities market has been intensified by fear and rumor-mongering.

On August 18th, 2011, the Dow declined a whopping 415 points based on a “trio of disappointing economic readings” and a Morgan Stanley report that the US and Europe may be heading for another recession.

Those losses were erased a few days later as the Dow posted consecutive gains of 322 and 145 points based on an “FDIC report that the number of US banks in trouble is declining.” The Dow slipped 388 points on September 22nd, 2011, for a 3.48% loss based on “several reports…warning of the dangers of another global recession.”

Again, the losses were erased by a 272 point rise two days later on rumors that the German Parliament would vote to expand the bailout fund for Greece.

From this, it seems that the extreme upswings and downswings in stock prices can be attributed to only a few economic reports. To a rational observer, a few poor (but far from disastrous) economic readings should not lead to a 3.48% decline in the blue-chip stock index of the most financially powerful nation in the world.

The tremendous attention that investors are paying to small,  insignificant data points may be evidence that the levels of fear currently exceed market rationality. “The market is moving around more than justified by the news,” Professor Zitzewitz says.

The fear could be stemming from group psychology. The closeness of the financial community, in which relationships rule all, could potentially lead to prolonged bouts of groupthink in which traders and investors move together in herd behavior, acquiring information only from those already within the circle and of the same mindset.

As a result, the effects of a single, unfounded rumor is intensified as it moves through the collective conscious of the financial markets, unchallenged by outside analysis.

Prospect theory also suggests that people who have already achieved gains would be risk-averse, while those who have suffered losses become risk-loving.

It’s possible that as investors received overwhelmingly favorable returns in 2009 and 2010 have now become risk-averse, and even the slightest tremor in the financial bedrock would lead them to quickly shift their investments to less risky instruments.

Ironically, it is the very fear that leads investors to take their money out of stocks that makes the stock market decline. The actions of the investors are a self-fulfilling prophecy.

The fear, volatility, and global decline in financial markets may not be justified, but by their very existence, create an environment that reaffirms their fear.

As Flexner states, “Fear, unfortunately, becomes self-fulfilling. It’s investor’s fear that creates redemptions, forces hedge funds to sell their liquid assets, and eventually decreases the values of those very assets. That’s the biggest problem with fear. Fear in the financial markets transmutes itself into  reality.”