When Moral Hazard
becomes Mortal
Hazard
Edward P. Richards
Professor of Law
LSU Law Center
richards@lsu.edu
What is Moral Hazard?




Economics origin
Distortion of market signals
Behind US Savings and Loan crash
Now behind the sub-prime mortgage crunch
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
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
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
Coastal Elevations
Examples of Storm Surge Damage from
Hurricane Katrina
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
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

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
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
Examples of Flooding in New Orleans
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?
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?
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
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?
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
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
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

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?
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 Katrinarelated litigation
Huge budget surpluses mask the loss of the
underlying business infrastructure
Terrible legal infrastructure in NO undermines all
property resolutions