My grandma taught me how to knit years and years ago. She only just started giving me lessons when she died, though, so I never got particularly good at it. And, since I was using all of her equipment (needles, yarn), I didn't have access to it anymore once my aunt sold everything in the house.
I'd really love to get back into it, though. It was relaxing. The only problem I had was that my fingers get stiff very easily, so knitting would sometimes make them quite sore.
As for that yarn, I agree that it would look fabulous as a bag. I think thick plastic white handles would look great. You know, the ones from the 60s... I tried to find a picture, but I failed miserably.