Hiring people you know - close friends, old coworkers, childhood friends, family, or whatever - isn't always bad. I won't go into whether you define it as Nepotism or not, but a lot of times hiring people you know is great.
If I was in a position where I had to hire some people, either because I was starting a company, or was promoted to the lead of a project and needed to recruit new team members, or was an HR person, or whatever, I'd be all about hiring a bunch of my friends. Having gone to an excellent technical school, I have numerous incredibly smart, talented, hard-working school buddies who I would go for in a flash. I know what they can do technically, and know how they deal with people, having watched them struggle through classes, worked with them on team projects, lived with them, dealt with plumbing, worked on independent projects, and dealt with interpersonal problems. I know exactly what I'd get, and know it's of the highest quality.
Hiring someone you don't know, even if you talk to past employers, look at their resumes, and have a thorough interview, is a lot riskier. You don't know what you're going to get. Additionally, by hiring someone you know, you'll likely see them get settled in and become productive faster, as you'll both be more familiar with each other.
This doesn't just go for technical jobs either (although, where I to be practicing Nepotism by hiring my friends, I'd pro'lly mostly know good technical people), Any time you're hiring people you already know well, you're not taking as big of a risk, and also get someone who will become comfortable and productive sooner.
Now, if you hire a friend or family member that you know to be an incompetent, mouth breathing idiot, you deserve whatever you get.
Arrr, it be the infamous pirate, No Beard Pete!