Selected answers from the Dumb SEO Questions Facebook & G+ community.
Ryan Jones: It`s not always bad. If say Chrysler owns Dodge, and they link to each other - that`s a useful link for users. So it depends on the reason and context.
George G.: There is nothing wrong in `link exchange` if it is contextual and adds to the picture. Just dont make it from pages named `Friends` full with 50 links to other websites lol. e.g pcmag links to techradar and vice versa all the time.
Pshemislav Kaspshik: Link exchange and 3 way exchange was abused as a SEO approach back in the days, that is why SEs don`t like them IF that is your main link gathering technique
Michael Martinez: If you don`t care about whether the link influences a site`s relationship with the search engines then the exchange is not bad. There is no law against exchanging links. But there was a time when we did it for the sake of influencing search engines. It was easy to do, had great effect, and the search engines objected. So it just comes down to what you hope to gain by the exchange and what you`re willing to live with. I suspect if you`re talking about a 1-time exchange with a site you really like there won`t be a problem (for you).
Benj Arriola: Before we talk about how Google tries to figure this out... or what signals show it is a link exchange specifically made just for the sake of getting links... let’s look at why Google doesn’t like this in the first place.
The reason why Google looks at links as a ranking factor, they are like votes of trust, authority and credibility. People decide to link to a page for a reason which is like a testament of quality.
If you just decide to partner up with a random site and link to the each other with the intent to rank high, does not show the same quality testament. Thus the link is not like a vote of trust, credibility and authority. So Google does not think the link is a good one to consider for ranking.
Now on the part how does Google figure this all out is a whole different story. But just keep this in mind when you are trying to gain more links. Are the links like true natural reason that the source of link thinks you are credible, authoritative and trustworthy?
Steve Gerencser: I love this game. Can I make a business relevant to any other business in 1 move? Mostly.
Funeral home and Storage lockers. Easy. Did Grandma pass away and you need a place to store her stuff for a few months while you recover? Try our friends over at XYZ Storage and tell them grandma died to get a 30% discount on the first 3 months storage.
:D
Steve Wiideman: If it doesn`t appear organic, it could be flagged and impact rankings.
If you have something awesome and helpful you want to link to that improves your content, link away. If you are linking to sales content that might tick off your user or feel like advertising, use a banner instead and nofollow it so at least they get the traffic without you getting the penalty.
90s reciprocal links were in /links/ folder in mini directories that users never visited (let alone link to, mention or curate). The industry used Internet Business Promoter to send link exchange requests, all with hope of earning higher rankings. Eventually Google made it clear not to do his because no part of it was helpful.
Today`s unspoken link exchange practices aren`t talked about as link exchanges, more geared towards promoting content that "may" have an SEO benefit if that site sharing / mentioning your content leaves out the rel=nofollow.
Can you tell me specific reasons why link exchange is bad? 
