Buying insurance policies on our neighbors backyard

I'm reposting an entire comment and response from FreeExchange at the Economist:

Am I the only one who doesn't see what’s so terrible about taking out fire insurance on your neighbour’s house (assuming it doesn't compel you to commit arson)? Even if you don’t own your neighbours home, you might anticipate that a burned out, abandoned house next to your own would lower the value of your property. True, there is something mean-spirited about profiting from a neighbour's misfortune, but that's not worthy of outrage. After all, these are financial markets, not primary school.

Even if you don't own the security you bet against, you might hold other investments positively correlated to it. Or, what’s wrong with buying a swap on a security whose fall in value poses systemic financial risk? That swap allows you to insure against a fall in your wages or most of your other assets.

Response:

There's nothing wrong with these practices, in my opinion, but they don't seem to quite make her point, which is that society seems to think there's something nasty about betting against a company for something other than a hedge. These examples reflect trades meant to hedge risk.

But as she does go on to note, there are good reasons to allow people to speculate for speculation's sake (though tighter rules may be warranted, given behavioural inclinations toward, you know, frothiness). Bets made for profit provide crucial information to markets. If everybody on the street is insuring one guy's house, it may be because they think his house is in danger of burning down. This should be a pretty strong signal to the neighbour in question that his barbecue pit is too close to his porch (or some such thing). A financial derivative that improves the flow of capital, perhaps by providing the marketplace with better information, is worth having, even if some people make money buying and selling it for profit.