I'm trying to get a Ruby on Rails project started on Dreamhost, ruby version 1.8.7 I can't check the rails version because of the rake problem but I believe it's at least 3.0. I was having trouble getting the mysql2 connector to work with rake db:migrate and I was trying different versions of gems, and I installed a local version of bundle on ~/.gems, then uninstalled it, and now bundle and rake don't see the gems installed in /usr/lib/ruby/gems/1.8/bin.
I tried following http://wiki.dreamhost.com/Rails_3 to see if it was a path issue before I realized the local bundle gem may have caused the problem, and I erased my PATH by not including :$PATH at the end of the export command the first time. I looked up common $PATH variables and after following the link above the following are set to:
$GEM_HOME = ~/.gems
$GEM_PATH = /usr/lib/ruby/gems/1.8
$PATH = ~/.gems/bin:/usr/lib/ruby/gems/1.8/bin:/usr/local/bin:/usr/bin:/bin:/usr/bin/X11:/usr/games
So now I'm not quite sure if there was something in the $PATH that is now missing, or if it was the bundle install/uninstall in ~/.gems that make it so when I try to run rake db:migrate or bundle exec rails console I get the error "Could not find rake-0.8.7 in any of the sources".
EDIT: I tried following the directions on http://forums.site5.com/showthread.php?p=87539 so I added the GEM_PATH in environment.rb which points to the local and shared gem directories, ran irb and tried require 'rubygems' and require 'rake' which both worked, $: showed the correct version of rake, but still get the same error when trying to run rake db:migrate in the RoR app directory, "Could not find rake-0.8.7 in any of the sources".
EDIT: After getting rvm setup I was at the same spot, but after reading http://muffinlabs.com/content/rvm-and-bundler-dreamhost I changed the GEM_HOME and GEM_PATH vars (in config/evironment.rb instead of config.ru) to the rvm setup ones and rake no longer gives the "Could not find rake" error. The mysql2 adapter still doesn't work but that's another issue.
Use rvm. It handles any number of different versions of rubies and gems to avoid exactly this kind of headache.