The Belgium international has faced criticism throughout his entire four-year career at Anfield so far, but Loris Karius has failed to dislodge his teammate from the number one spot.
The Reds have kept just three clean sheets in eight Premier League matches, the most recent of which was a goalless draw with arch rivals United.
"I think he is potentially very good," Schmeichel said on Sky Sports' Monday Night Football show. "He has had a really good season. Against Leicester he dropped the ball, but that is the only mistake he has made.
"My problem for Simon has been that his decision-making at times has not been very good, and sometimes I feel he is a goalkeeper that, with the insecurity and criticism he is facing, he wants to show everyone that he is a good goalkeeper.
"It looks like he has calmed down a little bit and Jurgen Klopp has told him 'you're my number one, go and play as a number one' and he is now doing the job that he needs to do."
Liverpool have earned just one victory in their last eight games in all competitions.