Reciprocal links are bad for SEO and should be avoided. They are a clear attempt to manipulate the search results which is a big no-no. That's why Google specifically outs them in their webmaster guidelines. Additionally, by exchanging links you risk being considered part of a link farm which is another way to find yourself banned from the search engines.
Even without those two problems, reciprocal links have no SEO value. They negate each other or, even worse, you may be on the losing end of one and weaken your SE positioning. Link exchanges should be saved for websites in your niche that are well established and ahead of you in the rankings.
Actually that's a myth. Google will only ever punish sites that sell links, not purchase them. If they punished sites that purchased them, or it seemed like they purchased them, then a competitor could purchase links on your behalf and get your site penalized.
Is it "Stymiee" because you try to stymie a normal debate? Before this I was being polite, but you seem to have no idea about what Google is all about. First, Google promotes fair, democratic competition on the Web. This comes off as heavy handed sometimes in the application of their policies, but, nevertheless, this is what their after. What this means is that they would consider a company having deep pockets buying text links to be unfair practice. They want to be certain that an advertisement is recognized by both themselves and others as an advertisement.
Exchanging links. Again, you are dead wrong. Google says,
"When your site is ready:
- Have other relevant sites link to yours. ...
- Submit your site to relevant directories such as the Open Directory Project and Yahoo!, as well as to other industry-specific expert sites ... "
Exchanging links, or, having other sites link to yours and yours to others, is a very natural and democratic process. It can't be easily manipulated and it generally can't be bought (which is totally unecessary anyway). Think of link exchange services as dating services. They're just an intermediary or liason. The good ones serve a very valuable service, including linkmarket and linkalizer.
But, again, where you are fundamentally wrong is that SERP with Google comes from PR and PR comes from page count. Believe this or not, but don't try to misguide someone who is new to web publishing and looking for straight answers.