The original intention of arbitration is to enforce "Intention of Code is Law" to enable recovery of funds due to the result of bugs resulting in the lost of funds similar to the DAO hack case on Ethereum

This is not true. "Intention of Code is Law" was invented by Dan Larimer after the blockchain was already launched. It wasn't included in the original designs.

Other methods of ensuring securing your funds already exist, such as multi-sig, staking and multi-permission structures, and cold-storage with hardware wallet access.

Yes, but this is not contrary to base-layer arbitration. We can have them all: base-layer arbitration plus all the nice security features. A blockchain which uses only some of the security features available will be always less secure than one which uses them all, including base-layer arbitration.

In my view, on the base level, transactions should be immutable. A blockchain that is not immutable is worthless — nothing more than a typical cloud database system.

Yes, and in EOS transactions are immutable. All transactions are immutably recorded to the blockchain: stealing tokens/accounts, ECAF's ruling and BPs enforcing it. Nobody is removing or altering any transactions in the blockchain. There are only added new transactions, and they are authorized and made in accordance to the rules of the network.

Limiting the power of BPs is extremely important, just like limiting the power of governments as well, whether or not they are being good at this point in time.

That's why we have ECAF. It helps us to separate powers. Without it, BPs would to both rulings and enforcement. That is usually very bad idea. Now we have ECAF which makes the rulings independently so it limits the powers of BPs.

My proposal would be to simply disallow all transactions from a "protected" account to a "base-level" account that cannot be subjected to arbitration.

This would create two totally different ecosystems on the blockchain. It doesn't make much sense. A better way would be to create another blockchain with different rules.