Hello Folks,
In regards to the racemization of Thalidomide, most undergraduate textbooks will show how this is bad because it is way easier for people to learn something by example of a real life consequence.
However, if you need a reference article:
Testa, B.; Carrupt, P. A.; Gal, J. Chirality 5: 105-111 (1993)
The main explanation for how this occurs is enolization/tautomerization as was mentioned by Chemicalsuperfreak above. One can isolate either isomer, but upon addition to either an acidic or basic environment such as the human body one pure form will slowly convert to the other to give approximately the same amount of either isomer.
Since blood is widely reported to be slightly basic, a hydroxide ion would remove the hydrogen at the chiral center making water. The electrons from the bond would form a double bond with the carbon that has the oxygen attached to it. One of the bonds from the oyxgen carbon bond would kick up to the oxygen. At this point, there is water present because it is the main solvent in the body, so the negatively charged oxygen would remove one of the hydrogens from the water molecule regenerating the hydroxide ion used in the first step.
To get the other enantiomer of Thalidomide, just reverse the steps but place the chiral carbon's hydrogen in the other configuration.
As for Thalidomide's inability to racemize at body pH, I am unsure as to the kinetics of the reaction. It may be a slow reaction, but I remember reading or hearing about it in a lecture that one can detect Thalidomide in the body up to a week later.
As to why someone would give the drug, one has to look into the history of identifying isomers of molecules. At the time Thalidomide was being marketed, there was no sure way to identify one isomer from the other conclusively. People thought that they were giving a pure drug to people, and they didn't know about the teratogenic abilities of the one isomer because this was probably tested on people who were not pregnant.
As to how one isomer is good and one is bad, DNA is the culprit. Newer research suggests that the bad isomer binds to DNA and prevents proper cell replication. This would in turn inhibit proper skeletal formation. The good isomer can not properly attach to the DNA and therefore can not cause any of the effects seen with the bad isomer.
That is about all I can think of right now. If someone wants more info, just go to a Chemistry building and talk with an organic professor. Almost all would happily chat with you on this topic.