Tolkien Didn't Know Who Tom Was
Darek McG.

Of all the characters in Lord of the Rings, Bombadil is the most mysterious. It seems to me that Tolkien intended it that way. Is Tom supposed to be a Maia, a Vala, or even Eru himself? There is no way for us to know for sure, and I don't think Tolkien ever developed the character that far. I believe Tom is intended to be a riddle without an answer.

That does not mean we can't come up with our own theories to explain his existance. The key to Bombadil is that his power is bound to a relatively small piece of land. Tolkien viewed power as inate (the Elves had inate power, but humans didn't - the Numenoreans were an exception, but they had Elven blood). Humans only weilded "magic" by using objects of power (for example, the Ringwraiths). Sauron and the Istari were Maiar, and therefore had a great deal of inate power. So if power is inate, why is Tom's bound to his little piece of land?

This is not completely without precedent. Sauron bound a great deal of his power into the One Ring. This gave him control over the other Rings of Power, but it also seemed to increase his domination over the will of others. I don't believe this was a power inherant to any of the Elven rings, so it had to come from the One Ring itself. The point is, it seems Sauron was able to enhance his power in certain areas by binding his power to an external focus point (the ring).

I believe Bombadil was a Maia who did something very similar. It seems clear that his inate power was less than that of Sauron, and maybe even less than Gandalf's (remember, Gandalf was an incarnate Maia - his abilities were somewhat limited by being bound to a body). I believe Tom saw the threat of Sauron, knew he was outmatched, and dug into a defensive position. He bound his own power to his little piece of land, and by doing so actually enhanced it within those boundaries. This would explain why he has seemingly unlimited power within his world, but virtually none outside of it.