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When Moral Hazard becomes Mortal Hazard Edward P. Richards Professor of Law LSU Law Center

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.

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When Moral Hazard becomes Mortal Hazard Edward P. Richards Professor of Law LSU Law Center

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  1. When Moral Hazard becomes Mortal Hazard Edward P. Richards Professor of Law LSU Law Center richards@lsu.edu

  2. What is Moral Hazard? • Economics origin • Distortion of market signals • Behind US Savings and Loan crash • Now behind the sub-prime mortgage crunch

  3. 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

  4. 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

  5. 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

  6. Coastal Elevations

  7. Examples of Storm Surge Damage from Hurricane Katrina

  8. 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

  9. 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

  10. 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

  11. 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

  12. Examples of Flooding in New Orleans

  13. 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?

  14. 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?

  15. 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

  16. 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?

  17. 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?

  18. Evacuation Routes

  19. 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

  20. 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

  21. 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?

  22. 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

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