Google and snort around for papers and articles written on "liquidity traps." 

The Fed is in one. They made it. We're living it.

Basically, a liquidity trap is when a central bank cuts or influences short-term interest rates to zero or basically zero. At this point, there is little difference in the mind of investors, traders, et al between short-term debt at 0% and cash (which also pays 0% yield), and they prefer cash to buying short-term debt.

Why does this happen? Well, there are a variety of possible reasons, I'll list four:

1. Expectations of asset price deflation. People expect price(s) of some asset class (in our case, housing) to go down, so rather than take out debt to buy something that will decline in value, they'll sit in cash.

2. Expectations of increasing interest rates, which will cause losses if you buy the bonds now with low yields. Investors will sit in cash and wait for yields to rise first.

3. Banks become scared of lending, so the velocity of money slows. Lending to people when bankers have high rates of default or bad loans on their balance sheets is the primary cause, but now we have a second cause introduced: Paying interest on excess reserves held by banks gives the bankers a no-risk alternative to lending. Rather than make "more" money by lending money out, why not just pile it up on the balance sheet and collect the interest without any risk at all?

4. Consumers and businesses go into a cash-hoarding mode, paying down debt. The overall Fed consumer credit reports would have you believe that people are taking on credit again. Ah, they are.... but if you back out educational loans and focus on actual consumer-type loans to consume "stuff" instead of fatten the wallets of university presidents... the consumer is clearly not in a mode of expanding their credit line.

Symptoms of a liquidity trap? Monetary velocity goes down. The Fed's monetary policy amounts to "pushing on a string." As I said a couple years ago, this is the problem feared by central bankers: They're about like a rider on a horse. Imagine you have to control a horse with nothing but the reins. The horse is going too fast, and you want him to stop. Assuming you have the proper bit in his mouth, you pull back on the reins with increasing force and he eventually stops or throws your butt to the ground.

But let's say he's just standing there, and you want him to go. You slack the reins. He doesn't go. You slack the reins some more. He doesn't go. Now what do you do?

This is why man invented spurs, right? Central bankers don't have spurs, and we'd shoot them on sight if they tried to create something like them. 

What does monetary velocity look like? Here's the Fed's estimates of velocity of "MZM" - Money with Zero Maturity:

http://research.stlouisfed.org/fred2/series/MZMV?cid=32242

What is the usual theoretical proscription for "solving" a liquidity trap? Fiscal stimulus (ie, Congress spending money). That option is pretty much off the table now.