I think you are being a bit unfair on NATO Alistair, don't forget it's a military alliance, and as such its purpose is to fight not negotiate.
I do agree in principle as I said above, that the Western governments had the chance to prevent this situation but did nothing as you note. Supporting Panic was not the only option, if they, and unfortunately we are talking principally about the US, had put money and support into the Yugoslavian economy, or even made it easy for Yugoslavia to export to the US, there would not have been the undercurrent of resentment for Milosovic to exploit. I still believe we will have to do this in the end if we are to stabilise the area politically, so how much better it would have been to have done it first and avoided any bloodshed.
Personally I am far more inclined to the "cock up" theory of history rather than "conspiricy", but it is undeniable that the foreign policy of any government is dictated by the political realities of their electorate, and I do believe that the lobbying of the industrial military complex in the US and the need to maintain a "growing" economy took precedent over a more reasoned view of what would be the long term effects of abandoning the area to its own devices.