Now you are thinking like a National Security Council staffer.
Why is avoiding *any* damage to his country worth even the smallest chance of losing face? He can go down in history as the leader under whom NATO inflicted terrible punishment on the Serbs, but they resisted and they endured and they prevailed (because NATO eventually went away), thus retaining the historical core lands of the Serbs for Serbia. He can go down in history as the leader who buckled under to NATO pressure, starting the chain of events that led to Kosovan independence.
If you were Milosevic, which would you choose? As long as he is confident that NATO will eventually get bored and go away, the first option would seem more attractive to Milosevic...
Brad DeLong