As you know, synthetic CDS do not protect a real world position, but are rather pure gambling. They enable conflicts of interest, like creating MBS that are doomed to failure, selling them out the front door to investors while betting heavily against them out the back door. There is no legitimate insurable interest, and it's a zero-sum game.
http://blogs.ft.com/maverecon/2009/03/should-you-be-able-to-sell-what-you-do-not-own/#axzz1bGr1MmFf
Of course, this is a part of the free market. This is like free speech: I'm not supportive of everything said, but I am supportive of people's right to say it. My attitude towards dealings in private property is all the same.
In other words, those market strategies don't create wealth at all, as you originally claimed, but just move it from one place to another, often from the pockets of many have-nots into the pockets of a very few have-a-lots.
It's perfectly reasonable for society to outlaw financial practices that do not serve the purposes of wealth creation, and that are, in fact, designed as exploitation and deception in pursuit of financial gain. Just because it's "free" doesn't mean it's acceptable in a market system, because other people depend on the markets and institutions involved. The necessity of bailing out the big banks tells us that.