I like the concept behind favored classes for each race. At the very least, it gives the player and DM a starting point when designing a character of that race. However, the current implementation leaves much to be desired.
I personally don't agree with some of the racial favored classes, especially the gnome bard or elf wizard. Fortunately, these can easily be changed by the DM without affecting the balance in the current rules. However, not all players or DMs may be as willing to modify this.
As Lasher Dragon says, a favored class should probably reward a character more, rather than having it be an experience penalty for cross-classing as it is now. What that reward would be is certainly open for debate. I think a race/class-specific feat or skill point bonus might work. For example, maybe have Dwarf Fighters gain Toughness as a bonus feat for choosing their favored class (which would also help them qualify for Dwarven Defender later on), while a halfling rogue might gain extra skill points for choosing their favored class. It's certainly food for thought.