The stock market hasn’t just been hitting new records. Its rise has been accompanied by a noticeable lack of anxiety among investors. Here is what’s a happened to the VIX—also known as the fear index—a measure of the volatility anticipated by traders in S&P 500 index options. (Investors use options to bet on or to hedge against future movements in the market, so the way they are priced can give you an insight into what investors expect.) Now market pundits are beginning to freak out a bit about the shortage of people freaking out. Why? Three words: The Great Moderation. That’s what self-congratulatory policymakers and bankers had started calling the decades leading up to 2007. Inflation was low. GDP had smoothed out. Markets were calm, too. And then—boom! Josh Brown last week at the Reformed Broker: Volatility is nowhere to be found – not in currencies, in fixed income or in equities. Complacency rules the day as investors and institutions gradually add more risk, using leverage and increasingly exotic vehicles to reach for diminishing returns in an aging bull market. This as economic growth – led by housing and consumer spending – stalls out and the Fed removes stimulus that never really worked in the first place. On Monday, Mohamed El-Erian on Monday raised the possibility of another “Minsky moment,” last seen in 2008: [The late economist Hyman] Minsky went further in demonstrating how stability ends up breeding instability. …At some point, financial stability becomes too much of a good thing, because it encourages excessive and ultimately irresponsible risk taking by individuals and institutions. In the process, the economic system and, therefore, collective interest are threatened. The Buttonwood columnist at the The Economist sounded a little less worried: But this feels nothing like the late 1990s when equity markets seemed obviously bubbly; flows into equity mutual funds have been very restrained and there is no sense of popular enthusiasm for the market (depending on who you believe, in 1929, smart insiders sold stocks because elevator operators or shoeshine operators were dispensing tips). What we have is a very odd market, in which volatility is extremely low, and economic optimism seems high as judged by the equity market but not by the bond markets, emerging markets or commodity prices. One thing about the Great Moderation. Even at the time, people noted that despite big-picture, macroeconomic calm, individuals and households experienced considerable volatility in income, and not much growth. This turned out to be the economy’s Achilles’ heel: Once real-estate prices backed up, it became clear how much many households were depending on debt to stay afloat. More than five years after the crash, Zillow reports that nearly 19% of homes are still underwater, meaning borrowers owe more than the house is worth. Households’ balance sheets are wobbly. Investors may be calm, but on Main Street the economy continues to feel precarious.