DrTandem1:
You're right. A webmaster could indeed get his competitors penalized with a scheme like that under the right circumstances. Google will overlook one link (maybe even two) to link farms on a page if the overall quality of the other links is ok. Otherwise it would never be safe to engage in reciprocal linking campaigns at all.
The problem arises when a page has a higher than normal number of links to "bad neighborhoods". If a page has 20 links to it and one of them is to a link farm, you'll probably be ok.
But if that same page links to 2, 3, or more link farms, you should probably expect the page to incur a penalty.
This is why selecting link partners by hand is much safer. I check the
PR of the pages that I link to periodically. When I discover that one of them has been hit with a PR0, I delete the link.
If you find your link partners through a "database" of link swappers, your ratio of bad links to good links will be higher than normal and you'll eventually incur a penalty.
And if you have more than a handful of outbound links, you may not "catch" all the bad links before Google spiders the page again, leading to a PR0 for the page with the next update.
Been there, done that. As have a large number of my clients over the years. This is how I got quite a few of my clients actually. They hire me to clean up the mess.