We've already long ago thrown out market forces in deciding safe locations for housing, with flood insurance, earthquake insurance, and others underwritten by the government (my earthquake insurance comes from the state). It's a bit late to throw them back in now even if you wanted to...when you are dealing with real estate capital it's the sort of thing that will have to be phased out over many years.

So, government is going to pick up a lot of the tab anyway, and besides, if government funding should be used for anything, helping citizens recover from major natural disasters should probably be near the top of the list.

That being said, cities have been rebuilt from much worse damage, particularly after wars, and I assume the same will be done with New Orleans. Some of the historic sections have not been flooded.