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When Moral Hazard

becomes Mortal

Hazard

Edward P. Richards

Professor of Law

LSU Law Center

richards@lsu.edu

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What is Moral Hazard?

Economics origin Distortion of market signals Behind US Savings and Loan crash Now behind the sub-prime mortgage crunch

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Moral Hazard in Public Policy for Disaster Management

Insulation of individuals and businesses from risk signals such as the insurance market

Promulgation of comprehensive but completely unworkable emergency preparedness plans

Refusal to discuss predictable but politically unacceptable failure scenarios

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When does Moral Hazard become Mortal Hazard?

When the politically unacceptable scenario occurs Preparations do not match the event's needs No amount of preparation would sufficiently

mitigate the consequences When the long term consequences come into play

No US disaster planning makes provisions for long term business dislocation and refugee relocation

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Hurricanes

Geographically limited Cyclonic

Driven by heat Latent heat of fusion as rain is produced

Produce a unique storm surge Up to 30 feet above high tide level Huge wave action

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Coastal Elevations

Examples of Storm Surge Damage from Hurricane Katrina

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Was Katrina an Unprecedented Event?

Outliners New York City Earthquake The big one on the west coast Smallpox

"Routine Disasters" Horrible things that happen less frequently

than the historical attention span

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Gulf and Atlantic Coast Hurricanes

Tens of thousands of lives lost Whole communities swept from the map A major city reduced to a tourist backwater A much bigger storm than Katrina - Camille - hit

the same place as Katrina in 1969 New Orleans has been hit and flooded regularly for 300

years Last storms - 1947 and 1965 Was only grazed by Katrina

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Katrina in New Orleans

New Orleans was spared the storm surge and a direct hit, as well as the high rainfall

It was flooded because of it's unique geography This geography is the story of New Orleans

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What Happened in New Orleans?

Some levees failed because of water pressure undermining their base

Some levees were overtopped Once overtopped, levees fail unless special

precautions are taken Levee failure allows the water in the city to rise to

sea level The water must be pumped out

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Examples of Flooding in New Orleans

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Can Levees Protect New Orleans?

The primary strategy for protecting New Orleans has been levees

Always fraught with political issues 1967 plan and the current levees

What would it really take? Height and environmental damage What about armoring the levees like the Dutch?

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Restoration of the Wetlands

One theory to protect New Orleans is to restore the wet lands Changes in river sediment

Rechannel the river Would there be enough sediment? Would this be politically possible?

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Why are the Wetlands Disappearing?

Subsidence Subduction Sedimentary consolidation What does subsidence mean to the gulf coast?

What does subsidence mean for levees? Navigation Canal theory

Does not address land sinking away from the canals

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The Timeframe Issue

All the solutions, whether workable or not, take decades, and there is little protection until they are almost complete

What does that means for the inhabitants in the unprotected interval?

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The Insurance Issue

Federal Flood Insurance 250,000 cap heavily subsidized

Private insurance No flood/water damage Historically no risk premium

Do we subsidize it? Who pays in a state based system? What are the implications for moral hazard?

Evacuation Routes

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Why the Evacuation Failed for Katrina

No one would admit that the city could flood Destroy property values Create political firestorm for a false alarm

Federal plan was fine No one can ever say the plan is unworkable Neither the feds nor the states want to really

face the hard problems

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Issues with Evacuations

Timing

Takes at least 2 days if you provide transportation and help

Uncertainty of Storm Path assures a lot of false alarms

Costs

Infrastructure Personal and business disruption Destroys convention business for 4 months

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Where are We Two Years Later?

Everyone can rebuild where they want No real requirements on elevation Social justice advocates want the poor relocated

back into the city No plan for future protection

Hostage theory Is this the right approach?

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Legal Issues

Imminent Domain Constitutional Amendments May make any systematic rebuilding

impossible because the things like the 30 right of redemption

All policy decisions paralyzed by the Katrina-related litigation

Huge budget surpluses mask the loss of the underlying business infrastructure

Terrible legal infrastructure in NO undermines all property resolutions