Since no one else has posted about it, I just wanted to throw out a resource that the Google Webmasters blog released today. It again talks about what Google believes to be a quality backlink, best practices, and spamming. It also mentions how reciprocal linking and buying page rank passing links are the two worst forms of link building. Check out the link, hopefully it will spark some conversation: http://googlewebmastercentral.blogspot.com/2010/06/quality-links-to-your-site.html
i've been telling always not to do link exchange and being tired of telling, i even wrote up a blogpost here. but still people pursue such method. oh well, some people will never learn
If you would do SEO as Google recommends it to do, you would be always on SERP positions between 100 and 100...000 ;-)
What google put out there on the blog just makes sense. I think it all comes down to relevance. If you get on relevant sites and start socializing with the community - it makes sense that Google will count this since you are getting "true" (not junk) traffic to your site.
I think they're talking about reciprocal linking in general. Personally, in our link building and SEO campaigns, we use no reciprocal, three way, or link wheels. It's just bad practice....at least in our opinion.
Or the people who deserve to be ranking higher for the quality of their content, products, and services would actually be ranking high. I completely agree with Google's stance on linking, but I do understand what you're saying.