How did Melo hold his team hostage? He told them he'd be leavign in free agency, and gave them the option of extending-and-trading him, trying a sign-and-trade in the offseason, or losing him for nothing.
He held them hostage by demanding that he only be traded to NY or NJ. This limited the value Denver could get for him. I'm not blaming Melo here, but the system. Hope that's clear.
Denver was able to get a lot of good pieces instead of getting nothing because of the extend-and-trade provision (not in spite of it).
I would argue that if there was no extend-and-trade provision, Denver would have looked to trade him a year earlier and Denver would have gotten more because he wouldn't have been able to dictate what team he would be traded to. Every team in the league could have bid for his services (competitive balance anyone?) instead of only the teams he demanded to play for.
Utah made the deal they made because it was the best they were going to do.
Kind of contradicts with what you just said. If the extend-and-trade enabled Denver to get a nice return for Melo, how did the Jazz get so much for Deron? They didn't use an extend-and-trade. Without the extend-and-trade option, this is exactly what Denver would have done, and I would have no problem with it. Then Melo would be forced to stay with his "new" team, or accept a pay decrease to play elsewhere.
Again, what is your solution? Force players to play with the same team for the length of their respective careers?
No one is forcing players to only play for one team during their entire careers, but there has to be consequences for leaving a team as a superstar.
Extend-and-trade is just a loophole around Bird rights. Most of us like the idea of Bird rights as it can help us keep players that we currently have on our roster, if we're willing to pay. It gives us leverage over other teams. It doesn't "force" the player to stay, rather it gives incentive to stay. With extend-and-trades, that leverage is negated when a player demands a trade. It allows a player to still chose where he plays, and also to maintain his bird rights pay level.
I would rather just end bird rights than have a silly loophole that leads to situations like what Denver faced.