Elsewhere here is Emanuel Derman on Twitter, on volatility products:
This isn't deep, but I think part of the reason vol is low is because vol has become an asset class. Once upon a time you had to buy or sell options and hedge them to trade vol, because an option gave you exposure to both stock price AND volatility.
Think about CDS. Once upon a time you had to buy corporates & short T-bonds to trade credit, because a corporate had risk of credit and rates. Then with the invention of CDS that gave pure exposure to credit, it became easy to speculate on credit. And eventually a credit bubble.If you believe in efficient markets, then moving from one form to another -- from bonds plus Treasury hedging to credit-default swaps, or from options plus stock hedging to VIX products -- should be just an administrative convenience; it shouldn't change anything in the real world. But of course the point of a bubble is that it is a breakdown in market efficiency, an irrational event. And "irrationality occurs when a previously difficult thing becomes easy" is a pretty satisfying explanation: If it's hard, you have to be smart to do it; if anyone can do it, then irrational people will....
Similarly the invention of variance swaps and the VIX led to a way to trade volatility as an asset class, and to think of it that way. And hence easy to speculate on volatility, to sell it without having to hedge equity exposure, and hence (perhaps) a volatility bubble.