For all the guys you've just cited where the Knicks have overpaid, the FO was trying to turn a bad/mediocre team into a winning team. There is a huge difference in the profit of MSG when the games are sold out vs when they aren't (also, they can charge more money for a good team). So, it is in Dolan's best interest to overspend if it means he is turning a bad team into a good one.
With the Knicks roster as currently structured, we know they are likely to be a 4-8 seed in the playoffs, even without Lin. This is good enough to justify ticket price raises and will keep the stands filled. The New York media market is large enough that it does not rely on the asian fans/ad revenue brought in by Lin, since the space will sell to another company. So, by matching Lin's offer, you're putting the Knicks on the books for 70 million over 3 years with little gain in ticket or ad sales. Yes, it is possble to trade him before the third year, but once Dolan were to match that offer, from a strictly business standpoint Lin becomes a large liability.
So that is why I think he would make the ridiculous offers to guys like jeffries/jerome james when the Knicks were bad, but is more reluctant now. Also, you make the point about Dolan taking things personally in the past/not operating on logic. Yes, this is a good point, but I do want to make the point that there are more people than just Dolan in the decision process. Saving the money on Lin does not just benefit Dolan, as some of it could be spread around to people in the FO in their next contract or bonuses.
Again, maybe I am giving Dolan too much credit, but the people i see playing up the "betrayal" storyline (Stephen A, Isola) are the same people who benefit from people believing that the original offer was agreed upon, since they were the ones who reported it.