Let's go point by point.

1) Regarding diabetes and the FDA:

I don't think removing the FDA is going to find a cure for
diabetes.

Well, before the FDA as such even existed, Banting and Best came up with the idea for insulin supplementation in 1921. A patient was treated by 1922. They won the Nobel Prize by 1923. Today's FDA would have made their methods completely impossible and they would have been criminally prosecuted.

http://www.nobelprize.org/educational/medicine/insulin/disco...

Early in 1921, Banting took his idea to Professor John
Macleod at the University of Toronto, who was a leading
figure in the study of diabetes in Canada. Macleod didn't
think much of Banting's theories. Despite this, Banting
managed to convince him that his idea was worth trying.

In January 1922 in Toronto, Canada, a 14-year-old boy,
Leonard Thompson, was chosen as the first person with
diabetes to receive insulin. The test was a success.
Leonard, who before the insulin shots was near death,
rapidly regained his strength and appetite. The team now
expanded their testing to other volunteer diabetics, who
reacted just as positively as Leonard to the insulin
extract.

The news of the successful treatment of diabetes with
insulin rapidly spread outside of Toronto, and in 1923 the
Nobel Committee decided to award Banting and Macleod the
Nobel Prize in Physiology or Medicine.

Point: the FDA need not exist to make progress against diabetes. That is, federal regulation is not a necessary condition.

2) Regarding type I vs. type II errors:

We need the FDA to regulate drugs and medical devices.
There's too much potential for quackery.

So that is the key question: is the goal to allow rapid technological progress or is the goal to prevent quackery? You can of course eliminate all quackery by rejecting all new devices (high false negative rate), and many major innovations sound like quackery at the beginning. Here's another Nobel Laureate, Barry Marshall.

http://www.nobelprize.org/nobel_prizes/medicine/laureates/20...

The extreme skepticism of my colleagues led me to believe
that I might never be funded to perform the crucial trial
of antibiotics... I realized then that the medical
understanding of ulcer disease was akin to a religion. No
amount of logical reasoning could budge what people knew in
their hearts to be true. Ulcers were caused by stress, bad
diet, smoking, alcohol and susceptible genes. A bacterial
cause was preposterous.

3) Regarding researcher income:

We should be paying medical researchers similar incomes to
engineers at Silicon Valley tech firms.

The thing is that the entire higher education establishment is about to crash hard with the student loan bubble. I think an alternative paradigm is to reduce the equipment costs associated with starting a bio lab, via diybio.org, biocurious.org, openpcr.org, and the like. This goes in hand with broadly reducing capital costs (regulatory + equipment). In so doing it will become easier to do biotech startups with a Valley culture, and the salaries will follow.

4) Concerning stem cells:

California taxes are funding one of the biggest research
efforts into stem cells.

Nothing against CIRM, they're fantastic. But the FDA is forcing the resulting stem cell startups overseas.

http://blogs.nature.com/news/2012/10/texas-stem-cell-provide...

Last September, Nature predicted a stem cell showdown in
Texas, between the FDA and a company providing unproven
stem cell treatments, and that seems to be happening. In a
severe “warning letter” posted on the agency’s website this
week (but dated September 24, 2012), the FDA told
Sugarland, Texas-based Celltex Therapeutics Corporation
that its stem cell products fall under FDA regulation and
need to be approved before use in patients.

The letter is a challenge to new regulations that the Texas
Medical Board put in place in April, which had made FDA
approval an option, not a requirement. Those regulations
state that doctors injecting stem cells into patients need
FDA approval or the approval of a local institutional
review board (IRB). The warning letter makes clear that the
FDA expects its approval to be mandatory—effectively
replacing the “or” with an “and”.

http://gizmodo.com/5881492/according-to-the-fda-your-stem-ce...

In recent court filings, the Food and Drug Administration
has asserted that stem cells—you know, the ones our bodies
produce naturally—are in fact drugs and subject to its
regulatory oversight. So does that make me a controlled
substance? The bizarre controversy revolves around the
FDA's attempt to regulate the Centeno-Schultz Clinic in
Colorado that performs a nonsurgical stem-cell therapy
called Regenexx-C.

5) At the end of the day

We need the FDA

You might want to look at the FDA Alumni Association (http://fdaaa.org) or the membership list of the Alliance for a Stronger FDA (http://strengthenfda.org/members/).

Why is it in Roche's interest to lobby for a stronger FDA? Because FDA alumni are hired by large manufacturers to lobby the FDA and increase barriers to entry for startups. When you get into the details of how regulations are actually enforced, it is all about relationships/politics/press coverage and has very little to do with technical merit.

I could go on in this vein...among other things, you might be interested in the fraction of pre-1938 drugs and pre-1976 devices that are routinely prescribed from an ostensible age of quackery.

However, the fundamental idea is not really to convince people who want the FDA that it should continue to exist, but to get a critical mass of people who don't want the FDA to create a place where it does not have power. Then you and those who agree with you can reside in the US, where the FDA has sole authority. And we can opt-out of the FDA, as both patients and entrepreneurs.

This is going to require thinking outside the confines of the United States and US politics, but the payoff will be nothing short of a revolution in the pace of biomedical innovation.