I think your 3rd point is interesting... can you trade Melo straight up for anyone in the league and still win the title? You are probably right, no you can't. The Knicks problem is they are paying Melo like he is a guy who you can build a team around when in reality it's looking like he would be an amazing complementary player but is never going to win anything as big dog (pun intentional). This is why the rest of the Knicks roster is so bad... they had to gut it in the first place to get Melo.
Let me start out by acknowledging up front that I despise the Knicks, and I'm pleased that the Pacers are taking them behind the woodshed in this series.
Just had to get that in.
But I don't think that the Knicks nucleus is as bad as some suggest--they have some quality pieces of the puzzle in place. Felton is a nice player, and I assume that they'll be able to keep Kidd around for another year or two in a diminished role, to add veteran leadership, stability, and poise. Shumpert is another nice, young piece of the puzzle.
Chandler is starting to get up there. I still think he has several good years left, and I wouldn't look to move him at that salary. Rebounders / defenders of his caliber aren't common, and he is one of the few players who is comfortable being only a complimentary player on offense, in terms of getting shots.
I honestly think that the problem is with the rest of the roster. And Knicks fans won't want to hear this after the year he just had, but Smith is too inconsistent to be relied upon. The Knicks best bet IMO is to move on from headcases like Smith and Martin [who admittedly has performed well since signing on late in the season], and start to fill the roster with less expensive role players who are better system fits. Give me a lunchpail guy like Landry any day over someone who is going to bitch at the refs and get distracted the first time a call doesn't go their way, or who are easily rendered non-contributors if they aren't scoring big.
Amare has to go. He might still have some trade value, but that contract is an albatross for what he's capable of providing. I think the Knicks best bet is to emulate a team like Indiana or Golden State or even San Antonio, and just start to flesh out the roster with quality depth guys. Two journeyman bigs who are content being role players will probably provide more value than Amare, provide way better depth / defense, and make a fraction of what he's tying up in salary cap.
Smith might be a better player and athlete than someone like JJ Redick [just as an example], but the latter would provide a lot more value as well as more consistent outside shooting. NY needs to load up on shooters and rotation bigs. If they do that, the depth will improve IMMENSELY [and injuries were a factor for NY this year], and get guys who can space the floor and balance the defense.
I tend to agree with what was stated above about Melo not being "good enough" to win a championship on his own. But that doesn't mean he CAN'T win a title--the key will be assembling the right supporting cast.
And also, with all due respect to Woodson, who has done a pretty good job there, I think you need a coach who has a better offensive game plan that running ten thousand isolations every game. At the very least, there has to be an assistant coach out there with top flight offensive teaching capabilities--maybe Woodson stays, but turns the reins over to an offensive guru to structure that part of what the Knicks do [similar to Doc Rivers having Thibodeau "run" the defense when he was in Boston].
Summarizing all of the above, I disagree somewhat with the OP that the roster needs to be blown up. The Knicks have the nucleus to be successful for several years. What they lack is depth, role players who fit the system, defensive oriented bigs, and shooters. Adding inexpensive free agents while supplementing with the draft [they'll be picking too low to add top caliber talents, but drafting solid role players like Shumpert will help flesh out the roster] can help them build the roster over the next 2-3 years, and take some of the burden off of Carmelo. Melo was lights out for a significant portion of the season, but the playoffs are a different animal. The defense is so much better, and he's trying to do too much. Maybe he wouldn't have to with a better supporting cast. My viewpoint on Melo as a pro is that less is more; he's always capable of putting up 40 any given night. But he'd probably be exponentially more dangerous scoring ~24 on a more balanced team, with other guys who can put the ball in the basket, where he doesn't have to be the focal point every possession.