when moral hazard becomes mortal hazard edward p. richards professor of law lsu law center...
TRANSCRIPT
When Moral Hazard
becomes Mortal
Hazard
Edward P. Richards
Professor of Law
LSU Law Center
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 Katrina-related litigation
Huge budget surpluses mask the loss of the underlying business infrastructure
Terrible legal infrastructure in NO undermines all property resolutions