"Felt paper" is heavy paper that has been soaked in asphalt (bitumen oil). It is typically used as roofing or siding applications as a weather barrier to divert wind-blown liquid water that gets by the siding or shingles, keeping it from soaking moisture-susceptible materials inside the walls. The asphalt makes it fairly waterproof, but still somewhat permeable to water vapor. The felt comes in varying densities & thicknesses- 15 pound felt used for siding is appropriate here, 30 pound felt used as roofing underlayments may not provide sufficient drying rates for the bales.
The intent of wrapping the lower course with felt is presumably to keep water splashing onto the wall under the roof edge drips or snow drift water from getting into the bales, while still allowing moisture in the bales to eventually dry.
I assume this picture is something like what the inspector intends:
http://www.designbuildbluff.org/blog/wp-content/uploads/2011/10/DSC01970.jpg
This would be in-addition to any felt or housewrap used under the siding, but what is required under the siding itself depends on what siding method/material is used.
No felt product is sufficiently waterproof to use as the barrier between the foundation and bales. The foundation barrier is to keep ground moisture from getting to the bales & other insulation.
"The barrier shall run vertically between the perimeter insulation and the foundation wall and shall run horizontally under the bale wall and then double back to the outside edge of the foundation...."
That means that if you have insulation on the interior side of the foundation, the water-proof membrane you use to keep ground moisture wicking up through the foundation wall or footing to the bales must also be inserted between the foundation wall and insulation. It needs to extend under the bales and fully out to the outside of the foundation without any breaks or unsealed seams. (In most bale homes it's also extends down the exterior side the foundation to a bit below waterproofing tar, and sealed to the tar, but that doesn't seem to be required in the phrase you asked about.)
This material needs to be completely waterproof to both liquid and water vapor, not something that can wick water or pass water vapor freely. EPDM membrane materials used in commercial roofing works well in this type of application, since it is quite flexible and durable, and does not tear easily. (Polyethylene sheeting at 0.010" thickness might work too, but it is more easily damaged, and can be degraded by sunlight on construction sites.)
This one appears to be a UV-resistant polyethylene version that extends to only the exterior edge of the foundation:
http://myblog.mapafuture4u.com/wordpress/wp-content/uploads/2010/08/00079.jpg
There does not appear to be interior-side foundation insulation in the above picture though.
In this picture they show R10 insulation inside the foundation wall, but no isolating membrane (which would violate NM code.)
http://www.sustainable-building.co.nz/footing3.jpg
To meet code per the NM code phrase you cite, the moisture barrier would need to extend between the R10 insulation and wrap over the top of the foundation out to the exterior edge of the concrete.
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