Each year the world's central bankers head for Jackson Hole, Wyoming, to take stock. Last year's meeting was dominated by the brewing economic crisis: Participants spent much of their time in a command center set up to monitor and respond to developments. The center was up and running again at this year's get-together last week, but it was usually empty. Instead, the bankers were generally optimistic about the state of the global economy and were beginning to look around the corner to the next stage in the recovery.

Mr. Ben Bernanke, the chairman of the U.S. Federal Reserve, set the tone for this year's meeting, declaring that "The prospects for a return to growth in the near term appear good." His optimism was matched by that of Mr. Stanley Fischer, governor of the Bank of Israel, who concluded that "It is reasonable to declare that the worst of the crisis is behind us, and that the first signs of global growth have appeared earlier than we generally expected nine months ago."

The positive outlook has been fueled by signs that the slowdown is slowing. Mr. Bernanke noted that the U.S. economy appears to be leveling out. Sales of existing homes in the U.S. leaped 7.2 percent in July, the fourth consecutive monthly increase and the biggest monthly increase in over a decade. Most important, it is the first year-to-year increase since November 2005. For its part, Japan registered 0.9 percent growth in the second quarter of 2009 from the previous quarter, while key European economies of Germany and France recorded 0.3 percent growth. Not surprisingly, the attendees were also inclined to give themselves credit for responding as quickly as they did, sometimes fighting prevailing sentiment, and stopping the situation from getting even worse.

Bankers are realists, however, and thus their optimism was tempered on three counts. First, participants acknowledged that recovery was likely to be slow and was by no means guaranteed. European Central Bank President Jean Claude Trichet confessed that talk of a return to normal economic conditions made him "a little bit uneasy." That sentiment was echoed by Mr. Fischer, who added that "We may be relaxing too soon," a view shared by Mr. Bernanke, who admitted that "strains persist in many financial markets."

Second, while governments have done well to revive their national economies, they have done precious little to fix the regulatory structure that permitted this crisis to emerge and do its damage. Thus far, the priority has been on stimulus measures, and various national governments have gone a long way to compensate for the consumer demand that has dried up.

Figuring out what went wrong and why is imperative, but the temptation will be to focus on other assignments to avoid the blame game. That temptation must be resisted. Regulatory reform is essential. Credit markets must be strengthened and banks prevented from undermining the real economy in the pursuit of quick and easy profits.

The third challenge is unwinding the emergency measures that these central banks undertook in their attempts to stimulate national economies as domestic demand collapsed. Fears of inflation have already seized politicians and economists, and there are growing calls to raise interest rates and embrace tighter monetary policies.

This dilemma is acute in Japan as parties call for more spending to fix social ills — a ready response in the runup to an election — even though the country already has the largest debt of any developed economy. U.S. decision-makers are equally conflicted as they debate health care reform and the prospect of yet another trillion dollars in spending.

Central bank officials need to keep an eye on inflation — that is their mandate. But they should first pay attention to the state of the overall economy. The "green shoots" of recovery may be visible, but caution is critical. The rebound is fragile at best and weaknesses in financial institutions and consumer demand could undermine the progress that has been made.

It is not clear if this is a V-shaped recovery, a "U," a "W" or an "L." While stemming the decline of GDP is an accomplishment, it is not enough to reverse policy.

Central bankers must first ensure that growth takes root and economies take a positive course. Only then can they focus on soaking up the liquidity that has flooded world markets. Yet the focus on these two tasks must not prevent central bankers and political decision-makers from pursuing the regulatory overhaul that is needed to prevent future crises.

Fixing that problem requires a difficult and painful admission. Much of the growth in recent years has resulted from easy credit. In fact, much of the growth of recent years has been illusory: The easy finance that propelled the global economy to record heights was the equivalent of a Ponzi scheme.

A more rational, balanced and stable global economy will not be as liquid or as rich. The greatest danger today is forgetting that simple truth.