rake db:create gives me
Unknown database 'xxxx_devel'
(See full trace by running task with --trace)
Using rake --trace db:create pointed me to the following line in config/environment.rb:
config.active_record.observers = :user_observer
which I had added as part of configuration setup for restful_authentication.
I commented out this line and rake db:create ran fine. I will investigate more later, but this got me going for now.