For several days, I have been stuck on this article, really stuck. When you write as much as we do, you occasionally get stuck. You have a topic you want to discuss, but the words do not coalesce. This was one of those times, and it was a little tricky to pinpoint the problem.
“It has been said that history repeats itself. This is perhaps not quite correct; it merely rhymes.”
I broke that mental logjam by backing off and letting thoughts ferment. Here are my fermented thoughts, and they are ominous.
History Does Not Repeat, It Rhymes
What has concerned me is the current economic climate, discussions on financial shows, and YouTube discussions about historical precedents for the present. This all dovetailed into the term “K-Shaped Economy,” which I first heard on Adam Tagggart’s Thoughtful Money YouTube Channel.
But Taggart expressed another concern, the “I-Shaped Economy.” That was what was gnawing at me, and I could not weave the discussions together cohesively. At the root of our problems is a practice, now a habit, in lending called “Extend and Pretend.” It applies to both the arm and the leg of the “K” and is fraught with danger everywhere.
“Extend and Pretend” lending is now everywhere and affects all segments of our economy, but it does so in very different ways. If you wake up each day, watch the financial news, and feel like you are living in a dystopian world where pundits tell you how great things are for consumers while you see news stories about rapidly rising consumer debt in all forms, join the crowd watching the evolving “K”-Shaped economy. We are living in a time that may just mirror Dickens’ A Tale of Two Cities. Typically, we see only the first twelve words of this quotation, but the entire quotation is profound.
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going to Heaven, we were all going to Hell.”
Dickens did a great job of describing the economic conditions and the resulting disparities that led up to the French Revolution. What we are experiencing is not new. We are living in the world Dickens described, and avoiding the perils of his plot is essential. In A Tale of Two Cities, Dickens describes what happens when an economy transitions from a “K-Shaped” economy into an “I-Shaped” economy. As Taggart and others have noted, the “I-Shaped” economy is to be avoided at all costs.
My Introduction to the Problem
Many years ago, when I first entered the world of banking, we jokingly called certain loans “Evergreen Loans.” As a young trainee, you learned that these loans had characteristics not worth challenging. They were such a tiny fraction of loans, both in number and in dollars, that they were a mere curiosity. But as often happens in history, an annoyance in one era can take on a life of its own and metastasize into a catastrophe. In the insightful words of The Doobie Brothers:
This phrase captures the financial world we have lived in since the Great Financial Crisis. It fits within a broader philosophical and social commentary that has circulated for decades and speaks clearly to shifting moral standards on Wall Street and Main Street. These changing social norms blur the line between repeated vices and habits.
The Luck of the Family Tree
Regulators knew that “Evergreen Loans” were more likely to be repaid by a family member or through an insurance policy upon the borrower’s death. In some cases, the loan collateral was a payable-on-death insurance policy. These loans were my first exposure to the concept of “Extend and Pretend.” When the loans were renewed, you would smile and present an extension or a new loan that included the original borrowings, interest, and insurance premiums.
These loans were a small-scale version of our national conundrum. The borrower had little understanding of economics or hard work and no intention of repaying the debt. They knew they could continue enjoying their lifestyle, leaving the debt and its fallout to someone else. If this sounds familiar, it should; it is where we are as Americans. We are privileged by birth and have lived on debt for far too long. Unfortunately, we cannot leave the nation a “payable on death” policy to atone for our lifestyle. We own the mess and must find solutions.
Genesis of the Problem
Wall Street has a long record of turning yesterday’s excesses into today’s norms. Whenever we face a banking crisis, banks tighten their lending standards to recover and avoid repeating the same mistakes. But this round of tightening brought a different set of problems that were only partially addressed. Cleansing the economy of bad debt and allowing bad investors to suffer the consequences of their mistakes is part of capitalism’s painful cycle. It is how we learn and avoid future errors.
“What Were Once Vices Are Now Habits”
But in 2007, we had grown soft and allowed the Federal Government to absorb most of the shock, to extend and pretend with taxpayer money. They turned the mistakes of a few into problems for us all by using public funds to save the banking system. At first, this seemed rational because we were keeping depositors whole. But it was irrational because we allowed those who created the problems to remain in place, and they have repeated their mistakes under different guises.
Today’s Problems
There is irrationality in today’s markets. We now believe there are no market crashes, only brief interludes when the federal government steps in and enforces shared pain. A system in which many who did not create the problems become responsible for the irresponsible actions of the few.
We now have generations of Americans who believe that markets always go up, that the Federal Government is responsible for all bad financial behavior, and that debt is a means to finance consumption. This is a cycle we must break before it breaks us. This cultural shift has infected us individually, in business, and in government.
Student Loans
Student loan forgiveness gave a whole generation the latitude to make poor decisions, taking on massive debt for worthless degrees and then refusing to take responsibility for those choices. All of this sets a terrible example of how to live and handle debt. Now that repayment is required, we see declining credit scores, wage garnishment, and problems with home purchases.
Loan forgiveness is problematic on many fronts. However, with student loans, student accountability is bypassed while colleges and universities are rewarded for their inefficiencies. But at least someone is accountable, and lower enrollments at many colleges and universities are the result. The solution is to move student loans away from the Federal Government and back to private banks. This forces both the lender and the borrower to ask tough questions about the cost of a degree and the borrower’s creditworthiness.
Commercial Real Estate
Throughout 2024 and into early 2025, CNBC and FOX Business anchors discussed the looming financing brick wall in the commercial real estate market. Then, all of a sudden, it disappeared. Many estimated the looming catastrophe at up to $6 trillion. The COVID hangover, in which office space demand shrank, is the genesis of this problem. Couple that with interest-only loans, higher interest rates, and aging buildings, and you have a formula for disaster.
This discussion has never disappeared from YouTube and other platforms with greater freedom of speech and thought, which is worth noting. Not everyone on YouTube is a qualified economist, but I have to caution myself that none of the FED’s Ph.D. economists can forecast a recession. So, letters after your name do not guarantee great insight or foresight. The solution is to end extend-and-pretend in commercial real estate and let the market reset to actual values. A painful COVID hangover!
Individual Loans
Right now, regulators are looking the other way at extend-and-pretend consumer loans, and we are building toward a very ugly crescendo. Rising auto loan delinquencies and repossessions, payday loan delinquencies, mortgage delinquencies, and foreclosures are all on the rise. The cure for this is not more extensions and government intervention, but to flush the system. The solution is to end the securitization of loans. Forcing lenders to keep and service the loans they make enforces good lending practices. With consumer debt now exceeding $18 trillion, this seems unsustainable. It will limit who gets credit, but that is one of the mechanisms to create a healthy economy.
Paper Bond Losses
Because of high interest rates, banks were allowed to ignore their paper bond losses. To do otherwise would have forced the banks to raise more capital or go under. In theory, as rates come down, these losses begin to disappear. These losses still total in the hundreds of billions of dollars, and banks need to strengthen their reserves to better reflect the risk. One solution is to enforce the Basel III regulations on American banks after 2026, giving banks time to raise capital and adjust to falling rates. Long-term rates will probably not fall, so this will be painful, but it will be better in the long term.
We Own Our Personal Financial Situation
Everyone’s situation is different, but common sense tells us it is time for serious changes. If you believe inflation will persist for a while, then owning assets makes more sense than just holding dollars. We all need to work to reduce debt and break the habits we have enjoyed for decades.
This is most difficult in the leg of the “K-Shaped” economy where money is tightest, but it can be done. The first step is to decide that each day we will spend less than we earn and invest the difference. It is hard, harder than racking up mountains of debt. But I have never talked to anyone who was out of debt and thought it was a bad idea. It takes discipline and hard work, but personally and as a nation, it is a move we must make while we can.
To do less will have us living in the Dickens’ world of A Tale of Two Cities. A place where the “I-Shaped economy will lead to very unpleasant consequences.
References and Further Reading
HOUSEHOLD DEBT AND CREDIT REPORT (Q3 2025), Federal Reserve Bank of New York, Last accessed December 30, 2025.
Quote Origin: History Does Not Repeat Itself, But It Rhymes, by Quoteresearch, Quote Investigator, quoteinvestigator.com, January 12, 2024.
Quote Origin: The Market Can Remain Irrational Longer Than You Can Remain Solvent: John Maynard Keynes? A. Gary Shilling? Harold R. Evensky? Apocryphal?, QuoteInvestigator, quoteinvestigator.com, August 9, 2011.
U.S. Banks’ $395B Unrealized Losses: 2026 Outlook and Trading Bank Stocks with AI Bots Yielding 33% Annualized Returns, Ticker On, tickeron.com, Last accessed January 29, 2026.
US Banks’ Unrealized Losses Now at $337,100,000,000 As Number of Lenders on ‘Problem Bank List’ Dips, by Mark Emem, The Daily Hodl, dailyhodel.com, November 29, 2025.
What Are the Characteristics of Banks with Large Unrealized Losses?, by Meguel Faria-e-Castro and Collin Eldridge, Federal Reserve Bank of St. Louis, stlouisfed.org, December 12, 2025.
What Were Once Vices Are Now Habits, by The Doobie Brothers, Producer Ted Templeton, Warner Brothers Records, Wikipedia, wikipedia.org, 1974.
Economic Labs, Echoes from the Republic
Hard Times, Hard Money, Echoes from the Republic
Gold versus Stocks 9, Echoes from the Republic
Our K-Shaped Economy, Echoes from the Republic
