I explained my position earlier in another thread on the subject.
Freedom of speech does not mean "freedom of speech when I agree with it". Hate is part of human nature, and there is no reason why you should be allowed to hate, and express your hatred.
The big exception to this being during times of conflict, which is what war powers exist for. Right now I've been of the opinion that we should be preventing some of the displays Muslims have been involved in recently (such as burning a poppy in the UK). But then again we're at war right now.
World War II ended decades ago, and we hunted down so many of the Nazi remnants that it's a tiny fringe on the outskirts of society. Anyone who was alive during that is going to be ridiculously old.
With the war over, I have no issue with someone using that symbol, or even expressing their hatred connected to it. That's part of free speech. Just expect me to have some things to say back, or to mute/ignore you (which is also my right).
I know a lot of people are going to disagree with me (and the exception that I mentioned), however as I said, freedom of speech works both ways. Once you start censoring hate speech and connected symbols, it's only going to snowball from there. I actually think people involved heavily in XBL multiplayer should be rallying against this, even if they do not care for the symbol or what it stands for.
I tend to see it as being similar to people using inverted crosses, pentagrams, and other symbols. Things like that can offend the Christian majority in most of the big market nations for games. That said, I don't think such things should be quashed on general principle.
I haven't looked at the statistics recently, but I wouldn't be surprised if Christians outnumber the population of jews, gays, gypsies combined throughout the US and most of Europe, and those are the groups that a ban on the Swatstika is an effort to appease.
In the end just about anything is going to offend someone, when you start worrying too much about that you wind up with everything becoming mindless, sanitary, and banal. Even if you wind up with clans of Neo Nazis playing FPS games and representing with those symbols, it's a far lesser evil than what Microsoft is currently doing. After all nobody is holding a gun to your head and forcing you to play with these guys, or to tolerant some kid just using the symbol to get a rise out of people.
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Oh and as a side note, I do not think Hitler's crimes were worse than Stalin's. I think they are both roughly equivilent overall. Hitler killed more people, but it can also be argued that a lot of good came out of the work of guys like Dr. Mengele which is why he's such an interesting figure to so many people. His research has doubtlessly already lead to saving far more lives than he took. Things like that are why things like "Operation Paperclip" with the US hiding Nazis, or collecting and using their research are such a touchy subject. In comparison I don't think anything really came out of "The Steel Angel's" reign of terror except a lot of dead bodies and political solidarity. It can be argued Stalin did what was nessicary to keep Russia together at the time when people realized the failures inherant in the revolution (a lot of people who fought for Communism had issues when they realized they were going to stay at the bottom of the pile and basically go back to doing what they did beforehand).
When it comes to historical psychopaths, Pol Pot and the Khymer Rouge make both Hitler and Stalin look like complete pansies. Especially seeing as Pol Pot is probably the closest thing we've ever seen to a comic book mass murderer. He really didn't have much in the way of a practical idealogy or plan. His big thing was to rise up against the corrupt city dwellers and kill them horribly. He had no real plan of what to put in place when that was done it seemed, so he simply turned to more mass murder to maintain any semblance of order. Simply put I think he was just a sadist who liked to see people die for the sake of it. Hitler's camps were pretty mechanical in killing people, and Stalin's brutality in the Gulags was to re-educate people into what he saw as productive members of society (he figured if 10 people die for every 1 that came out a good worker-drone, it was worth it). Pol Pot actually had rape and torture/mutilation intergrated into his system for the sake of causing horrible deaths, with no other real purpose except to cause horrible deaths.
This is not to say that Stalin or Hitler weren't bad, just that if we're going to start doing comparisons, they aren't even close to the worst.
I'd put Chile into this someplace, the Chilean Secret Police having been accused of some REALLY messed up stuff, but it never operated on this scale.