Federal efforts at flood control created areas in which people wanted to live, but which did not entirely eliminate the risks of floods, precluding private flood insurance. From Dale Steinreich at mises.org:
As the floodwaters brought by Hurricane Harvey last week recede and new hurricane Irma moves slowly toward the Eastern U.S., it might be edifying to review how millions of Americans, despite federal anti-flood efforts, came to live and work in hazardous to dangerous flood-prone areas.
The foundation of the current disaster traces back at least to the late 1920s under Republican interventionist Herbert Hoover. In 1927, a very destructive flood occurred along the Mississippi River. Secretary of Commerce Hoover’s relief campaign greatly increased the power of the U.S. Army Corps of Engineers to implement supposed flood protection.
No doubt, the Flood Control Act of 1928 helped construct what was considered one of the most impressive systems of levees in the world along the Mississippi River. However, the one thing it did not do was control flooding. While the new levee system prevented flooding in some areas, it quickened the natural current of the river which helped produce flooding in other areas. Other unforeseen consequences were the reductions in natural soil deposits and natural flow of water into the river’s flood plains.
Less than a decade later, another damaging flood in New England helped drive the passage of the National Flood Control Act of 1936. This Act was a real turning point in terms of centralization. Besides doubling the size of the federal flood-control program, it signaled that Congress would no longer merely provide occasional flood relief and regard floods as principally a local matter. It effectively enlisted the federal government and Army Corps of Engineers in the battle against floods.
For the rest of the 1930s and 1940s, private insurance markets were undermined because the Army Corps of Engineers built hundred-year flood walls which reduced risk just enough for homeowners to make private flood insurance too costly. On the other hand, private insurers saw these walls as insufficient protection which did not reduce risk enough. Regardless, an impasse was created for private markets that was both figuratively and literally cemented in place by the Army Corps.
To continue reading: How The Feds Blocked Effective Flood Insurance