Capello's 06-07 was a pretty forgettable Madrid team that, despite improving 2003-06 Madrid, was knocked-out in the UCL Round of 16 and won La Liga thanks to a lazy, autopilot Rijkaard Barça with an already decadent Dinho, a pre-08/09 Messi injured and/or playing (mostly) in midfield or winger and Eto'o injured for at least 6 months. Deco and Iniesta playing together in the same position didn't help either, with Xavi forced to play as DMF. Schuster actually improved Capello's Madrid by a long margin. Madrid won the 2007 Liga due to a direct defeat of Barça against local rivals Espanyol (EL finalists that season).
Btw, another sudden fall from grace: Schuster