Doug Dachille of First Principles Capital is on CNBC?s Squawk Box right now – an extremely impressive individual, with a clear perception on what is going on at the heart of the credit crisis. He has made some valuable observations about the US mortgage market, which has been edging up recently, despite the Fed?s $1.2 trillion commitment to buy:

1. The bidders pushing up mortgage rates right now are the banks. In doing so, they are moving up the market-to-market, which will support 2Q09 earnings and lead to mark-ups, beyond the fair value adjustments made in 1Q09. The result is that the banks can buy their way out of TARP all the easier, and start paying themselves for price recovery that does not reflect fundamentals.

2. On why the Fed is unable to prevent the mortgage rates from rising despite its huge ammunition committed to this plan, he says the problem is that the Fed is successfully closing the spread between mortgages and the 10-year bond, but they have only allocated $300 mln to buying 10-years to suppress that rate. This of course is nothing compared to $2 trillion of issuance this year. Thus, the rising bond is pushing up the mortgage rate, and undermining the mortgage price control plan.

This situation cannot be allowed to continue through 2010 and 2011, when the bulk of mortgage resets are due, and will surely lead to increased QE, something MM has also been predicting for sometime.