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It was solely because of Gandalf's manipulation of events and people, and Saruman's research into ring-lore that anything was ever done about the Ring. In other words, the Istari saved the world. It's irrelevant that three of the five turned out largely useless.
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Gandalf made errors of judgement and Saruman's obstruction and betrayal proved almost fatal.
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At that moment, though he had the power within himself to defeat that demon decisively, he remained loyal to the governing rules of his mission and kept his display of power in check.
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I disagree; he did the best he could to defeat the balrog; and there are other events in the past when he displayed his power (confronting the nazguls, lighting fires in the night, destroying the chamber of Marzabul).
To address your other points:
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Originally Posted by Letter #156
For in his condition it was for him a sacrifice to perish on the Bridge in defence of his companions, less perhaps than for a mortal Man or Hobbit, since he had a far greater inner power than they; but also more, since it was a humbling and abnegation of himself in conformity to 'the Rules': for all he could know at that moment he was the only person who could direct the resistance to Sauron successfully, and all his mission was vain. He was handing over to the Authority that ordained the Rules, and giving up personal hope of success.
That I should say is what the Authority wished, as a set-off to Saruman. The 'wizards', as such, had failed; or if you like: the crisis had become too grave and needed an enhancement of power. So Gandalf sacrificed himself, was accepted, and enhanced, and returned. 'Yes, that was the name. I was Gandalf.' Of course he remains similar in personality and idiosyncrasy, but both his wisdom and power are much greater.
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