I was able to fix this by downgrading RubyGems to 1.5.3, since it happens with RubyGems 1.6.0+ and Rails < 2.3.11:
gem update --system 1.5.3
If you had previously downgraded to an even earlier version and want to update to 1.5.3, you might get the following when trying to run that:
Updating RubyGems
ERROR: While executing gem ... (RuntimeError)
No gem names are allowed with the --system option
If you get that error, then update, so that it lets you specify the version, and then downgrade again:
gem update --system
gem update --system 1.5.3