I think Melo would help his image considerably (due to the way he forced his way to NY before the lockout in 2010, he is somewhat unfairly portrayed as someone who cares more about money than winning) , and help the Knicks chances of building a true contender given the rules of the new CBA, if he signed for a bit less than the max, similar to what LeBron/Wade/Bosh did in Miami. 5 years, $129m will make it awfully tough for the Knicks to ever have another star player, and enough good players to ever make a serious run at the title. A max contract for a 10-year veteran is much larger than a max contract for a guy coming off his rookie deal (e.g the Thunder 'only' have to pay Russell Westbrook $65m over the next 4 years). Guys like Dirk and Duncan were 'max' players for most of their career, but I don't think they ever took max money, in an effort to help their teams build championship caliber rosters.
I don't agree with the post above that trashed basically their whole roster. Essentially, the only problem is that they're paying Amare $22m/yr. If he was worth that (e.g. if he produced at the level of Kevin Love), they would be contenders. Felton is an average PG, but he's worth the $4-5m/yr they're paying him. JR's contract could prove to be a very nice bargain if he plays like he did last year. Chandler is worth every penny they pay him when he's healthy. Bargnani is overpaid (but not a downgrade from what they gave up for him), but Prigioni, MWP, Shumpert, Hardaway, Udrih, and Martin provide a lot of production for a group with an average salary of only $1.5m.