This is a rush transcript from "On the Record," January 19, 2010. This copy may not be in its final form and may be updated.

GRETA VAN SUSTEREN, FOX NEWS HOST: The GOP pulls off a stunning win here in Massachusetts, and our breaking news coverage continues live from Boston. We are waiting for U.S. Senator-elect Scott Brown to speak. First, Karl Rove joins us live. It's amazing, Karl, how one single election can change so much, isn't it?

KARL ROVE, FORMER BUSH SENIOR ADVISER, FOX CONTRIBUTOR: I've never seen one election like this. As you said earlier in the program, a month ago, Coakley was up as many as 31 points. This was a deep blue state. Barack Obama carried it by 26 percentage points. And yet storming onto the stage and into victory tonight is a young state senator from suburban Boston who has pulled off an extraordinary thing tonight.

VAN SUSTEREN: You know, Karl, we saw her earlier today, and she didn't seem very excited. She seemed worn out and tired. She didn't look like she was, you know, feeling like she was going to win. But of course, she put on a good game face. But the thing that struck me is that, how do you tumble down almost 20, 31 points in such a short period of time? And I -- you know, it's, like -- and when I hear the sniping out of Washington towards her, when they're the ones that did that Nebraska deal, which horrified so many, they cut the deal with the union -- I mean, she was really fighting an uphill battle after those two events.

ROVE: Yes. Look, they're going to blame her and -- but remember, she was the popularly elected attorney general of the state of Massachusetts. She beat other Democrats in a primary to win this nomination. This is not a -- you know, this is not a dreadful candidate. But you're right, she was burdened by a year worth of policy from the Obama administration which is out of sync with America, even in a deep blue state. And think about it. She was ahead a month ago by big margins, and yet what crystallized this whole race was the Christmas Eve vote on the health care bill, which, as you pointed out, included things like the "Cornhusker kickback," the "Louisiana purchase" and all these special privileges given out hither and yon in order to buy votes.

And the more that sunk in and Brown seized upon this -- he'd been talking about the deficit. He'd been talking about spending. He'd been talking about the establishment. He'd been talking about Washington and its ways. He'd been talking about government -- the expansion of government. He'd been talking about the war on terror. And you know, that sort of crystallized and gave him momentum. He then had some good debates.

And then, as you pointed out -- and I think it's absolutely right -- there it was, negotiating this bill behind closed doors after President Obama promised to do it out in the sunshine on C-Span, and then the big celebration about having reached the key deal which said if you're a union member or work for state and local government, you escape the Cadillac health care tax, but if you work in the private sector and got a Cadillac plan, you get with a 40 percent tax, unlike those union guys. It just stunk.

And what was amazing to me was, in the polling, the recent polling, Senator Brown was barely losing union households in the state of Massachusetts. I mean, this is a shocker. I don't think I've ever seen anything like this, that one single contest that is going to have as big a ramifications for America as this one does.

VAN SUSTEREN: See, I don't think it has anything to do with Martha Coakley. I really -- you know, I think that it's just, like -- how do you defend that $300 million deal? And she's naturally aligned with it by virtue of being a Democrat and being the one vote that's either going to be -- is going to keep the filibuster-proof Senate or not. I think that that was an insurmountable burden because I don't care which party you are, is that it just smelled so bad that it was hard -- hard if you had to be aligned with that.

ROVE: Yes. Yes, look, we -- to understand this election, you need to step back and look at the last year, and it is the cumulative effect of the policies pursued by the Obama administration which she defended and which she embraced and which she made the center point of the campaign. Remember, we had a debate several weeks ago in which you had a clear choice between President Obama's approach and the Democrats on the one hand and Senator Brown's approach on the other on everything from health care to taxes, to spending, to the war on terror. They had a deep disagreement upon the treatment of the Christmas Eve bomber.

We had a big battle here in the last week over the so-called bank tax. The administration's come out and said, We're going to tax the 50 largest financial institutions in America, not including Fannie and Freddie, of course, which are pet banks of the -- or pet financial institutions of this administration. And you had Coakley saying, I'm in favor of personalizing the banks and you had Brown saying no, it's going to be paid for by the consumers and we don't want that. So this has been a clear referendum on the Obama administration's policies.

VAN SUSTEREN: And then she attempted to make -- to put Scott Brown as a representative of the Bush-Cheney administration, and then he came out with the line, I'm a Scott Brown Republican. So it's, like, you know, she couldn't make that stick on him in any way.

ROVE: Well, and then we, of course, had the famous David Gergen reference in the debate to this being the Kennedy seat, and he said, No, it's the people's seat, which -- again -- this -- this is what is -- you know, the anger and dissatisfaction in America is about being told one thing in the 2008 campaign -- I will govern as a centrist, be concerned about deficits and spending, and I consider government-run health care extreme, as President Obama said in his ad -- and then being subjected to a year in which spending is through the roof.

Barack Obama will spend -- will add more to the national debt in the first 20 months and 11 days of his time in office than was added during the entire eight years of the Bush administration. And they're talking about a flood of red ink. They're talking about taxes. They're talking about expansion of government. And all of these things the American people were ill prepared to receive after the campaign that President Obama ran.

VAN SUSTEREN: You know, the other thing that struck me that I thought was a horrible faux pas for her was her timing, about two weeks ago, and you've got to raise money, you know, to run these elections, but she went to Washington to raise money, which made her look like she was very much in tune with Washington. She's putting herself right in that. And then there was a fundraiser where there were lots of health care lobbyists, special interests, and something that she should have stayed a million miles away from on, essentially, the eve of the election. I mean, she just walked into that mistake, so that -- I'm sure that didn't help her.

ROVE: Well, absolutely. In fact, again, though, it fits into the narrative. Remember, what we've seen over the course of the last year is that this bill is being written by the special interests, PhRMA, the Pharmaceutical Manufacturers Association, has been in bed with the administration since the beginning. The health insurance lobbyists have been sitting there, helping to write the bill. They've been attending the private meetings at the White House.

So you know, sure, they have a legitimate interest to be heard on this bill, but the whole way this has been handled has led people to believe that this is being done in a stinky way and it is not in the way that they were led to believe that President Obama would conduct it.

But I think you're right, Greta.

VAN SUSTEREN: You know, this...

ROVE: At the heart of this is not two different competing candidates, it is two different competing philosophies. And the people of a deep blue state have said, We don't like what we've seen represented by the Democrats and the Obama administration in Washington for the last year.

VAN SUSTEREN: Well, we drove about an hour-and-a-half this morning in the sleet to watch him vote, and the level of enthusiasm that he had compared to -- and even the mood that he was in this morning compared to the one we saw in her this afternoon was such a stark contrast. It's almost as if you could read it on their faces, you know, what was going to happen tonight because they both -- they both knew what was going to happen.

ROVE: Well...

VAN SUSTEREN: Now, what if...

ROVE: ... look, he had a message that motivated his people -- a message that motivated his voters.

VAN SUSTEREN: OK. What happens if Senator Harry Reid decides to be a little bit slick and try to move this health care bill fast -- you know, fast-flow it through the Senate and not try to -- not to have him sit and be -- and have a vote and have part of this process? What happens?

ROVE: There -- well, things will get worse for the Democrats. Look, they have seven seats which today are up for grabs or tilting towards the Republicans, everything from Delaware to Illinois to North Dakota to Arkansas to Colorado, to Nevada itself, Harry Reid's own seat. Those numbers are only going to grow. Republicans are going to have more chances because more good candidates will get in the race if they play games.

John Kerry, when he suggested that, Oh, you know, it's -- we got to wait days and weeks, perhaps, in order to have this certified -- you know, the Democrats have seated Vicki Tsongas on a short notice to the U.S. Congress. Ted Kennedy him was seated before it was formally recognized. This -- you know, he will have won by 100,000 votes out of two million cast in a state in which three million people voted in the presidential election. I mean, this -- this is more people than voted -- than are likely to vote in Massachusetts in the governor's race this coming fall. It's an extraordinary outpouring of votes, and with a big margin.

There's no way that he's not going to be seated as the senator. And they ought to seat him, as they have customarily done in the past, as the unofficial winner before the certification of the small amount of votes that have yet to come in for absentees and have yet to be counted in the days and weeks ahead.

VAN SUSTEREN: And for that point of reference about Congresswoman Tsongas -- she was elected in a special election, and two days later, she was seated before it was certified. She was sworn in so that she could vote on the question of an override of a President Bush veto, trying to override the veto.

But the -- but the interesting thing here, though, is that Martha Coakley has conceded, so it is over unless she pulls...

ROVE: Over.

VAN SUSTEREN: ... a former vice president Al Gore. It is over. So you know, there's no reason why they shouldn't repeat what they've done before, unless they're being cute and clever and saying the rules apply -- one set of rules apply to Republicans and another to Democrats.

ROVE: Yes. You know, there's something else we -- that's going to result from tonight. We have now got, like we had this past fall with Chris Christie in New Jersey and Bob McDonnell in Virginia, we have, you know, new figures on the political scene who provide teachable moments about how it is that a candidate on the center right runs a campaign.

Scott Brown has grown as a candidate. You could see in the footage of him a month or six weeks ago, and then you've seen him in the last couple of weeks, and here's somebody who has hit his stride, who's grown up politically and as a campaigner and as an advocate and as a spokesman, and it has been extraordinary to watch. He is an unusual talent, and I think we're going to hear a lot from him in the years ahead.

VAN SUSTEREN: Imagine how the White House is burning (ph) tonight. You mentioned Virginia, New Jersey, and of course, President Obama was here in Massachusetts and sort of on another sort of similar theme, he went all the way over to Copenhagen. I mean, here's a president who has been so enormously successful in so many ways, he keeps now hitting -- people are saying no to him now for the first time. You know, that must be a stunning defeat tonight at the White House.

ROVE: You know, it should be. And it should be a moment -- I think our colleague, Brit Hume, had a good point, which was that this could be a great moment for the Democrats if they sort of realize what is carried in the message of this moment and change their ways and try to govern from the center and govern in a bipartisan fashion, as they led the American people to expect they would do.

But I frankly have been watching closely the rhetoric of the White House in the last 24 hours. They have gone viciously after Martha Coakley, blaming it all on her, not on their policies, not on what the Democrats in Congress have done, not what the administration has done, but upon her. And then they have made things like David Axelrod saying, Well, all we really need to do is pass this bill, and we'll have plenty time to explain it. Well, they've been explaining it for the last 10 months, and the American people have heard them and have gone from being overwhelmingly in support to being overwhelmingly in opposition and dealing them a blow like they received tonight in a state that Barack Obama carried by 26 points.

You know, look, the last time the Republicans won an open race for a U.S. Senate in Massachusetts was 1966. They reelected Ed Brooke in 1972. I mean, this is an extraordinary loss for the Democrats. But the Obama White House makes it sound like it was all her fault and we just got to keep going in the direction we're going, right off over the cliff.

VAN SUSTEREN: You know, I suppose the president would be very smart to sort of look back in history and see how former president Clinton handled it when he took a body blow from the -- from -- when he -- when he took that hit with the Congress in '94.

ROVE: Right. I mean, in 1995 and '96, he came back and had productive sessions on the budget, passed welfare reform, but he did move back to the center. After going to the left in his first two years and losing the Congress, he came back to the -- he came back to the center. I don't think this president is capable of doing that. I don't think this president -- maybe later, but certainly...

VAN SUSTEREN: He's going to have to.

ROVE: ... I don't think now is -- well, but you know what? I don't think they're going to. I think they're going to look at these numbers and say, Well, we've got 59. There's got to be some way that we can get this thing done. And even if they don't get health care done, I -- you know, he may come out in the State of the Union address, I suspect, and give lip service to deficit reduction. but like, for example, on the TARP. They're getting the money back from the banks with interest and dividends and they're trying not to put that towards deficit reduction, as the Congress called for. They're trying to find a way to spend that money.

So you know, I think we're going to likely see more of the same from this administration. We're likely to see between now and November, hardball Chicago-style politics aimed at passing a very liberal agenda and, you know, a fundamental belief that this is what the country wants, that this is what the country elected him to do.

VAN SUSTEREN: But...

ROVE: When in reality...

VAN SUSTEREN: But if he...

ROVE: ... the country elected him to have reasonable, moderate, centrist-oriented change.

VAN SUSTEREN: But if the economy doesn't go -- doesn't take off, isn't soaring, is that they're going to take -- they're going to have another rude awakening come November, unless they get lucky on the economy and the employment rate comes plummeting down. I mean, they've gotten the message in Virginia. They've gotten the one in New Jersey. They've now gotten the message here. They may try to blame Martha Coakley, but you know, I -- you know, I -- I think this is a referendum on the Democratic leadership. But they're going to have a very rude awakening in November, so they might as well cut their losses now than take that bigger hit in November.

ROVE: Right. Well, you know, the stimulus played a role in this because, remember, a year ago, it got passed in February. And the administration -- the president himself said, If you pass the bill, employment (SIC) won't go above 8 percent. We'll have 3.65 million new jobs, and 90 percent of them will be in the private sector. And on each one of those points, this program, this stimulus program has been an utter, complete failure. None of those markers have been met.

And you know, this is why I think you're absolutely right. This had to do with the whole kit and kaboodle of the last year, the whole toxic stew of deficit, stimulus, spending, government expansion, health care. All of this came together in Massachusetts, of all places. I mean, if this had been Utah or this had been, you know, Idaho or this had been Ohio, we would have a better, you know, sort of acceptance that this was, you know, sort of in a deep red state or in a competitive state. But this is a deep blue state. Remember, this is one of the two jurisdictions -- that and the District of Columbia -- that George McGovern carried in 1972! This is an extraordinary defeat!

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