WASHINGTON - The stresses in the short-term municipal market, fueled in part by a mismatch in supply and demand for liquidity facilities, may reflect that variable-rate demand notes are not a viable financing mechanism for states and localities going forward, Federal Reserve chairman Ben Bernanke warned lawmakers last week, surprising some market participants.

"The current financial crisis has exposed the vulnerabilities of the VRDN market, raising questions about the desirability of its continuation as a significant vehicle for municipal finance," he wrote in a March 31 letter that noted many lower-rated issuers are no longer able to access the short-term market.

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