Why did this all happen? In my opinion, the answer is simple.
As governor of a state like Illinois, I'm sure you frequently meet with some of the most powerful people in the country. And some of the richest. And you probably help a lot of those rich people become richer (not necessarily in corrupt ways).
Yet the governor of Illinois makes a salary of $150,000, more or less. And what was he trying to get? In real terms, not very much: a position with a
salary of $300,000 (and other stuff, sure, but really not
that much - not a $120M no-bid contract anyway).
In one of my econ classes we studied Singapore or Hong Kong or somewhere like that, wherein government employees were given huge salary increases. The result? There was more competition for government jobs so better individuals ended up getting the positions. Also, since salaries were already high, the temptation for corruption was less because (1) it took more money to even be worth it and (2) the fear of losing one's job made it even less likely the person would want to engage in corrupt activites.
So my counter-intuitive solution is to pay these guys more. Because if one of the most powerful people in the state is only making $150,000, what else should we expect to happen?
Also, by the way, Blagojevich is under no legal pressure to resign his seat, and could even appoint a senate replacement today, should he desire.