Smith, speaking to BBC Radio, said: "This is Liverpool, not just an ordinary team. It is the history of what is on Merseyside and this team are just not good enough.
"The squad is not good enough. We have some really good players, but when we have one or two injuries we cannot cope.
"We get beaten at home by the likes of Southampton and Bolton. And we cannot scuff a win at Newcastle. Something is drastically wrong.
"Houllier spent £20 million pounds on El Hadji Diouf, Salif Diao and Bruno Cheyrou and they have not got the ability to play in our side, especially in the Premiership."
While Smith is quick to criticise many of Houllier's signings, he feels that the Frenchman deserves more time to awake a sleeping giant from its lengthy slumber.
He added: "There has been a lot of disappointments over the last couple of years, but if you look at the big picture and what the guy has done, Houllier has put Liverpool back on the map.
"But he has made a rod for his own back by winning early in his time at the club. Everybody expected the league title to follow and it has just not happened.
"Liverpool have got to stick with Houllier because he has been successful, but when the transfer window opens in January we have to buy three or four players.
"Some of the players at Liverpool just should not be there."
