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President Obama and Federal Reserve Board chief Ben Bernanke expressed cautious optimism this week that the economy is stabilizing. They are most likely right that we are at or near the trough of the recession.

But the question is how strong the recovery will be once it starts.

This has been no ordinary collapse; it would be wrong to expect a typical upswing. Among the many uncertainties, the biggest immediate worry is that the financial system, which has a vital part to play in any economic expansion, is still broken in ways that will be difficult to fix. The longer term could have some nasty surprises as well.

Speaking at Georgetown University on April 14, Obama gave one of the fullest accounts so far of his thinking on how the economy got into this state and how he proposes to mend it. The elements were familiar, but he took greater pains than usual to weave them together and present them as a coherent whole.

He was forthright in defending the Treasury Department's financial stabilization plan, which many have called too timid. The reason the government has not nationalized the big banks, he said, is not because of ideological objections to public ownership, or any desire to coddle Wall Street. "It's certainly not because of any concern we have for the management and shareholders whose actions have helped cause this mess," he said. Instead, it is because he believes that pre-emptive takeovers would do more harm than good, and are "more likely to undermine than create confidence."

All of the government's actions, the president said -- "the Recovery Act, the bank capitalization program, the housing plan, the strengthening of the nonbank credit market, the auto plan, and our work at the G-20" -- were necessary parts of a coordinated scheme, and "taken together, these actions are starting to generate signs of economic progress."

Bernanke's speech at Atlanta's Morehouse College on the same day was mostly along similar lines. He echoed the president's qualified optimism, referring to "tentative signs that the sharp decline in economic activity may be slowing, for example, in data on home sales, home-building, and consumer spending, including sales of new motor vehicles."

Numbers released on the day of the speeches did not exactly play along. March figures for retail sales came in worse than expected and showed a fall of 1.1 percent from February. Every category apart from food and health declined. At this, Wall Street's recent run -- the Standard & Poor's 500 index had climbed more than 20 percent from its low -- stumbled. The economy, as Lawrence Summers, head of the National Economic Council, put it recently, may no longer be in free fall; the rate of decline has slowed. But demand is still weak, and the financial system is still seriously ill.

Remembering that this recession is far from ordinary, the danger is reading too much into some of the more recent encouraging figures. For instance, analysts have noted that inventory levels are now falling -- usually a precursor of ramped-up production and, after a while, higher employment. Because output fell so precipitously, a comparatively modest revival in demand is capable of reversing the build-up of inventories and calling forth a correspondingly brisk increase in production.

For the same reason, some optimists think that the delay between reviving output and falling unemployment may be shorter than usual in this recovery. In effect, they argue, the sharper the downturn, the stronger the subsequent recovery -- which would ordinarily make sense.

The problem is that the financial system is not yet as capable of supplying credit as it would be in a normal upturn. Equally important, consumers have not yet come to terms with the beating that their savings (including equity in their homes) has taken in the past year. The more they try to rebuild their financial wealth, the smaller the demand for credit will be. So whether you look at the supply side or the demand side of the market for credit, financial conditions are not conducive to the strong recovery you would expect to see if this were a normal, inventory-driven business cycle.

How much trouble the banks are really in -- how they will fare in the "stress tests" ordered by Treasury -- is still anybody's guess.

How quickly consumer confidence recovers is equally uncertain. While these things remain unclear, nobody should get too excited about the country's economic prospects.

It is interesting that when Obama and Bernanke began to look beyond the immediate difficulties, they stopped reading from the same script.

The president talked about the need for fiscal discipline once the economic recovery is secure. Alluding to the Sermon on the Mount, he said this was to be one of the pillars of the "house upon a rock" that he hopes to build. Bernanke, in contrast, addressed the need in due course to reverse the Fed's aggressive interventions in financial markets.

They got the division of labor right, at least. It will fall to Obama and his team to lead the way on tax and entitlement reform, or there is little hope of bringing the budget deficit back under control. And the Fed's most important job, once this emergency has been dealt with, is resetting monetary policy to ensure price stability. Yet neither man was all that convincing, in my view, in this part of what he had to say.

"For too long," Obama complained yet again, "too many in Washington put off hard decisions for some other time, some other day."

Tough choices will have to be made, he said. Yes, they will. When does he intend to start discussing them?

His 10-year budget leaves a permanent fiscal gap of 4 percent of national income a year -- even after years of strong economic expansion, which the administration optimistically assumes, and despite the fact that the budget provides for half or less of the full cost of health care reform, as the White House admits. Entitlement reform as traditionally envisaged cannot close that gap. Nor can tweaking taxes by restoring "a sense of fairness and balance to our tax code by shutting down corporate loopholes and ensuring that everyone pays what they owe," as Obama put it.

The president knows that doing a few extra audits and closing a few loopholes won't be enough to solve the revenue problem.

To crank out that exhausted cliche even as he invokes the need for new honesty, the president must be either severely deluded or far more cynical than most people suppose. Make no mistake: His budget arithmetic calls for higher taxes -- much higher. That 4 percent of national income, which deliberately understates the fiscal hole, is equivalent to approximately half of what the current federal income tax collects. The president knows it is going to take a lot more than doing a few extra audits and closing a few loopholes to solve that problem. One hopes he does, anyway. So far, while constantly invoking the need to face difficult choices, he refuses to frame the one that matters most: How much are people willing to pay for the new things he wants the government to do?

Restoring fiscal balance is a huge challenge for the future, one the Obama administration is not yet willing to face. The Fed will have to confront a different and less obvious test, but one of equally daunting dimensions.

Bernanke has undertaken an extraordinary range of interventions to support the economy. They extend far beyond the Fed's traditional monetary policy tools, and they blur, if not erase, the line separating monetary policy and fiscal policy. Partly to evade congressional scrutiny of Treasury's actions, partly to get the cost of supporting the banks and shadow banks off the government's balance sheet, the Fed has committed trillions of dollars to reviving the market for securitized loans and supporting particular institutions or lines of business.

These loans and purchases of securities appear as assets on the Fed's balance sheet; their counterpart on the liabilities side is a massive expansion of the monetary base (mainly, the balances that banks hold as reserves with the Fed).

As Bernanke explained in his speech, when the economy recovers, the Fed will need to unwind those interventions, or else "the liquidity that [it] has put into the system could begin to pose an inflationary threat." The sheer scale of these interventions makes one wonder how the Fed will do this. It will call for creative thinking.

One possibility being floated by Treasury is that the Fed might be given authority to sell interest-bearing debt, explicitly acknowledging the Fed's new role as a fiscal policy maker.

The great danger -- one that the financial markets have not begun to grapple with -- is that the two issues will merge. Persistent and irreparable budget imbalance, plus a central bank as fiscal partner, is a formula for surging inflation. There is no sign of it yet: With demand so depressed, deflation is still the greater danger.

But it is not too soon to start thinking about the problem, and preparing people for the increases in taxes that will eventually be needed to avert it.