Developers make floods somebody else’s issue

When you ensure that someone will not suffer any consequences for their risky behavior, you create what is called a moral hazard.

That is because not only are you encouraging people to take risks and distorting economic markets, you are doing something immoral. For this, there are always consequences, and the only question is who is going to suffer them.

Every person who gives money to the National Association of Home Builders, the Mortgage Bankers Association of America, the National Association of Realtors or the Real Estate Round Table is guilty of creating a moral hazard. They are also guilty of profiting from flood disasters and sticking taxpayers with the multibillion-dollar bill.

In a meticulously reported story on Sunday, my Chronicle colleagues broke down exactly how these special interests

intentionally took the National Flood Insurance Program, which was supposed to reduce flooding, and turned it into a taxpayer-funded subsidy that encourages development in places where no structure should exist.

Taking empty land and converting it for human use is one of the biggest businesses in any country. Begin with the landowner and move on to the developer, the banker, the real estate agent, the construction companies and, by the time you get to the ultimate buyer, a lot of people have made a lot of money.

That’s how builders, bankers and real estate agents became some of the most powerful lobbyists in America. They are economically powerful, and no politician has ever lost an election because he or she did something to encourage economic growth in a community. This is why politicians and developers tend to have cozy relationships.

Normally, in a free market, people put their capital at risk only up to the point where the odds are they not will lose it. To help mitigate even the slightest risk, capitalists often take out insurance. Insurance companies run the odds, and the higher the risk, the more expensive the insurance.

Greedy builders, bankers and real estate agents, though, use their economic power to buy off politicians to avoid risk when insurance premiums get too high. The National Flood Insurance Program is but one example.

Instead of pricing the real risk, the program charges a fraction of the true cost of covering losses and relies on Congress to use taxpayer money to bail it out. You and I have contributed to the hundreds of billions of dollars paid out over the years because people built something where they shouldn’t have.

Numerous lawmakers over the years have tried to make the National Flood Insurance Program selfsupporting by charging appropriate premiums. But every bill that has tried to exclude properties that are repeatedly flooded, or required the program to levy realistic premiums, has been defeated by the lobby groups named previously.

The result is a huge subsidy for developers. Because if flood insurance were appropriately priced, the value of flood-endangered properties would plummet.

Demand for grand houses along beautiful bayous and creeks would dry up as people would realize that paying $10,000 a year for flood insurance means they are sure to get flooded.

Conservatives like to talk about letting the free markets decide business questions, and generally I agree. So let’s do away with national flood insurance and rely on the private market to assess the risk and levy the appropriate premiums for offsetting that risk.

Oh wait, we tried that. That’s how flood insurance worked before President Lyndon Johnson signed the National Flood Insurance Program into law in 1968. The reason Congress created the program was because no insurance company was willing to offer flood insurance.

That should tell us something.

The National Flood Insurance Program is not only bankrupt financially, but also morally. We should no longer subsidize risks taken by developers who are more interested in flipping dangerous properties than responsibly building better communities.

The question is whether we will put the necessary pressure on our elected officials to do the right thing, and when it comes to flood zones, break with their developer pals.