I thought I'd throw out some numbers to show to what degree Roger Federer declined between 2006 and 2008. Let's look at his losses for each of the three years:
2006 (92-5 overall, 12 titles)
A truly remarkable year - only 5 losses. Perhaps even more impressive, and rarely mentioned, is that he reached the final of 16 out of the 17 tournaments he played in.
Losses:
#2 Rafael Nadal at Dubai, F
#2 Rafael Nadal at Monte Carlo, F
#2 Rafael Nadal at Rome, F
#2 Rafael Nadal at Roland Garros, F
#21 Andy Murray at Cincinnati, R32
2007 (68-9, 8 titles)
Still very much prime Federer and one of his trio of three Slam years, 2007 sees subtle decline as he starts losing to non-elite players:
Losses:
#60 Guillermo Canas at Indian Wells, R64
#55 Guillermo Canas at Miami Masters, R32
#2 Rafael Nadal at Monte Carlo, F
#53 Filippo Volandri at Rome, R16
#2 Rafael Nadal at Roland Garros, F
#4 Novak Djokovic at Canada, F
#25 David Nalbandian at Madrid (hc), F
#21 David Nalbandian at Paris, R16
#7 Fernando Gonzalez at Tennis Masters Cup, RR
2008 (66-15, 4 titles)
Losses:
#3 Novak Djokovic at Australian Open, SF
#11 Andy Murray at Dubai, R32
#98 Mardy Fish at Indian Wells, SF
#6 Andy Roddick at Miami, QF
#2 Rafael Nadal at Monte Carlo, F
#27 Radek Stepanek at Rome, QF
#2 Rafael Nadal at Hamburg, F
#2 Rafael Nadal at Roland Garros, F
#2 Rafael Nadal at Wimbledon, F
#22 Gilles Simon at Canada, R32
#22 Ivo Karlovic, at Cincinnati, R16
#7 James Blake at Olympics, QF
#4 Andy Murray at Madrid (hc), SF
#9 Gilles Simon at Tennis Masters Cup, RR
#4 Andy Murray at Tennis Masters Cup, RR
So in those three years we see Roger go from 5 to 9 to 15 losses, and 12 to 8 to 4 titles. That's quite a steep decline. On the surface he bounced back a bit in 2009, but not really - 12 losses, 4 titles. This was probably mainly due to Rafa's injury-plagued year, otherwise he was a similar player in 2009 as he had been in 2008.
Conclusion: Federer declined steeply from 2006 to 2008, and never fully recovered. This was exacerbated--but not caused--by Nadal reaching his peak in 2008, and the emergence of Djokovic and Murray as elite players.
What is unclear is why Roger started to decline at the relatively young age of 25 (in early 2007). That wasn't unusual for players of his era and before. What is unusual is the slower decline patterns we've seen in later generations, namely Nadal and Djokovic. But their slower decline is probably exagerrated by the weak "Lost Gen."