First, there is the problem of measurement. Do grades measure smarts? Good ideas? The ability to get things done? Do they even measure what they are supposed to? As an economist who almost failed the exam in microeconomic theory (getting -- something like -- a 2.09 of 5.00 when the pass grade was 2.00), I can attest to the lack of correlation between exam results and actual knowledge (unless you think I am not an economist!)
Second, there's the HUGE problem of identifying yourself with your grades (or salary or car or bling or cup-size). If you do, you do yourself a disfavor. I was so LUCKY that my mom put me in a Montessori school. By the time I got my first grade (in another school, in 7th grade, a fail), I was aware that my identity was not derivative of my grade.
Third, there's the idea that grades reflect what you DID know, not what you learned. I've been trying to persuade my students that learning is more important than grades, but that idea goes against the point just above AND against the reward system they've faced for years -- good grades will get you places; bad grades will not.
This whole idea reminds me why I do water chats (tune in later for Tom Birmingham and Lloyd Carter) -- they allow one to express nuanced ideas, and a diversity of ideas -- a human-scale portrait -- rather than the nearly useless snapshot that a soundbite shows (and often shows with extreme prejudice).
Bottom Line: Grades are important as a measuring stick, but they fail to capture the numerous dimensions of a person.