I spoke too soon above. The high vision footage suffered the same through-a-watery window effect.
Gets very good results using a very different technique. Here is his in depth article.
The most important point is that he claims that one should use a size of 425x318 because that is in fact the size that YouTube broadcasts.
The writer also recommends the PhotoJPEG in Final Cut, but I don't think Vegas has one does it?
In vegas, using mp4, 1Mbs, 30fps and 425x318 is not so big as to produce a >100Mb file even at 10 minutes (this one 15MB for 2 minutes). The bigger size obviously creates a better quality intermediate file:
My attempt use video from a top of the range Panasonic HVX200 and a low quality Casio Ex p505.