Well the hostage situation was almost unavoidable with the Starks. The show doesn't go into much detail but Theon's older brothers were killed in the rebellion and he was the last son left, so Ned Stark kept him as leverage against Balon.
But other than that.... Balon was a bad father. I could understand making Theon earn respect when he came back but he acted like Theon went North by himself and forgot about the Iron Islands. Then he gets his manhood 86'd trying to make daddy proud and Balon is just like oh well. At least Tywin cares enough to keep the family lines running.
balon is such a fool man. imagine he had just took robb stark's offer? they woulda took over casterly rock in a couple of weeks. tywin would have been busy defending casterly rock, fighting robb and the tullys, and trying to stop stannis from getting to kings landing. stannis would have taken over without a doubt if balon just fukking listened to reason. instead he got his last living heir's dikk cut off and now the greyjoy name dies idiot. nikka out here playing checkers.
plus, wtf is in the north of value aint shyt up there but wilderness and rivers and the wall. he could have had all the gold in casterly rock.