[zrm]

Because names are scarce and squatting produces inefficiency. Someone who wants to make productive use of the name has to pay a middle man in order to do it, which reduces their resources available to do the useful thing and unjustly enriches the middle man who has provided nothing of value to anyone compared to the situation where nobody registers the name until they have a use for it. (Or, if multiple legitimate users want the same name at the outset, compared to having an auction where money goes somewhere meritorious like paying the cost of maintaining the naming system instead of to the jerk with the fastest computer.)

Although one of the best ways to discourage squatting is to reduce scarcity. Have hundreds of TLDs (.cars, .bank, .farm, .repair, .plumber, .housing, etc.), or if you're not ICANN and don't want to pollute the global namespace with multiple TLDs then second level domains (.cars.bit, bank.bit, etc.)

Then a squatter has to register hundreds of times as many names and each name has hundreds of times fewer prospective buyers. Combine this with some nominal cost ($10/year) to holding a name, irrelevant to normal users but prohibitive to someone who wants to hold trillions of names hostage. And which you want to have regardless to be able to reclaim names that have been abandoned.