Your reply seems to be a spot-on agreement with my post, except that you don't realize it. Your choice of analogy is particularly amusing in that, right now, if you'd had your money under your mattress, you'd be better off than if you'd invested in one of these highly-leveraged and over-exposed financial vehicles that I'd mentioned. Mattressing one's money may have been the best idea of them all for a large class of investors.
That aside, the proper way to make the analogy you're making is not to compare investing in a CDS against putting money in or under your mattress, but rather to compare it with putting it in a certificate of deposit in your locally-owned bank or loaning it to a locally-owned business. Either of these would very likely have less return and a higher risk for you. However, you would be less susceptible to a global default cascade like the one that is happening now.
The reason that ...your own data center [would] be better... isn't that it's less likely to go down, but rather that, if everybody has their own data center, the chances of a global blackout go down drastically. This is precisely the analogue I was pointing out. If banks had stayed non-optimum and local, then (arguably) we would not be facing a (potential) global economic meltdown.
You may argue (rightly) that if you pursue these localist strategies when everyone else is pursuing these more profitable consolidated strategies, which carry this systemic risk of catastrophic failure, that you'd succumb to competition from others. This is the point of asking for regulation in the market, and (possibly) the case for asking for it here. At some point, almost by definition, the cloud computing market will commoditize. When that happens, the only way to cut costs will be do do without redundancy, if that is a legally available option.
The underlying problem is that people discount the cost/benefit of events that happen in the distant future, and the global catastrophes in these two systems always seems distant.
Finally, one may object that if redundancy is such a good idea, then it will happen naturally and never be eroded by market forces. In this case, then, there can really be no objection to legislation on the matter, because everyone will naturally comply anyways.